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Full text of "Mergers and competition in the telecommunications industry : hearing before the Committee on the Judiciary, United States Senate, One Hundred Fourth Congress, second session ... September 11, 1996"

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S. Hrg. 104-862 

MERGERS AND COMPETITION IN THE 
TF! FCOMMUNICATIONS INDUSTRY 



GOVDOC 
: 4. J 89/2:S.H] 

o4-gfc^ I HEAEING 

BEFORE THE 

COMMITTEE ON THE JUDICIARY 
UNITED STATES SENATE 

ONE HUNDRED FOURTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING RECENT DEVELOPMENTS IN THE TELECOMMUNICATIONS 
INDUSTRY, FOCUSING ON THE STATE OF COMPETITION IN THE TELE- 
COMMUNICATIONS INDUSTRY AND THE APPLICATION OF ANTITRUST 
LAWS WITH REGARD TO CERTAIN MERGERS 



SEPTEMBER 11, 1996 



Serial No. J-104-95 



Printed for the use of the Committee on the Judiciary 



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UNIVERSITY 



GOVERryrvJ€NT OQCUr^LNTS UEI^ARir^^EKT ^ ^^^^ LlWHBH Y 

P^CE^yEO . JUL 3 11597 



1 MAR 



8 2000 





U.S GPO 

DEPO^ltORY 

DOCUMENT 



U.S. GOVERNMENT PRINTING OFFICE 
40-670 WASHINGTON : 1997 



For sale by the U.S. Government Printing Office 

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 

ISBN 0-16-055116-1 



\o^^ - ^^ 



S. Hrg. 104-862 

MERGERS AND COMPETITION IN THE 
TELECOMMUNICATIONS INDUSTRY 



GOVDOC 
4. J 89/2:S.H] 

04- gfc3 I HEARING 

BEFORE THE 

COMMITTEE ON THE JUDICIARY 
UNITED STATES SENATE 

ONE HUNDRED FOURTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING RECENT DEVELOPMENTS IN THE TELECOMMUNICATIONS 
INDUSTRY, FOCUSING ON THE STATE OF COMPETITION IN THE TELE- 
COMMUNICATIONS INDUSTRY AND THE APPLICATION OF ANTITRUST 
LAWS WITH REGARD TO CERTAIN MERGERS 



SEPTEMBER 11, 1996 



Serial No. J-104-95 



Printed for the use of the Committee on the Judiciary 



, _ BOSTON PUBLIC uSRhrT'^' s , aw^!5|^ 

GOVERr^MENT COCUMtf^lTS UES'^ARTftftEr^T \ ^^^ LIBRARY 



MAR 8 2000 




U.S GPO 

DEPOSITORY 

DOCUMENT 



U.S. GOVERNMENT PRINTING OFFICE 
40-670 WASHINGTON : 1997 



For sale by the U.S. Government Printing Office 

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 

ISBN 0-16-0551 16-1 



1 rsLl O - A 



COMMITTEE ON THE JUDICIARY 



ORRIN G. HATCH, Utah, Chairman 



STROM THURMOND, South Carolina 
ALAN K. SIMPSON, Wyoming 
CHARLES E. GRASSLEY, Iowa 
ARLEN SPECTER, Pennsylvania 
HANK BROWN, Colorado 
FRED THOMPSON, Tennessee 
JON KYL, Arizona 
MIKE DeWINE, Ohio 
SPENCER ABRAHAM, Michigan 

Mark R. Disler, Chief Counsel 

Manus Cooney, Staff Director and Chief Counsel 

Cynthia C. Hogan, Minority Chief Counsel 

Karen A. Robb, Minority Staff Director 



JOSEPH R. BIDEN, Jr., Delaware 
EDWARD M. KENNEDY, Massachusetts 
PATRICK J. LEAHY, Vermont 
HOWELL HEFLIN, Alabama 
PAUL SIMON, lUinois 
HERBERT KOHL, Wisconsin 
DIANNE FEINSTEIN, CaUfornia 
RUSSELL D. FEINGOLD, Wisconsin 



(II) 



CONTENTS 



STATEMENTS OF COMMITTEE MEMBERS 

Page 

Hatch, Hon. Orrin G., U.S. Senator from the State of Utah 1 

Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont 2 

Thurmond, Hon. Strom, U.S. Senator from the State of South Carolina 4 

Simon, Hon. Paul, U.S. Senator from the State of Illinois 6 

Feingold, Hon. Russell D., U.S. Senator from the State of Wisconsin 32 

Simpson, Hon. Alan K., U.S. Senator from the State of Wyoming 80 

CHRONOLOGICAL LIST OF WITNESSES 

Panel consisting of James R. Young, vice president and general counsel. 
Bell Atlantic Corp., Arlington, VA; James D. Ellis, senior executive vice 
president and general counsel, SBC Communications, Inc., San Antonio, 
TX; and Bernard J. Ebbers, president and chief executive officer, LDDS 
Worldcom, Jackson, MS 11 

Panel consisting of Michael H. Salsbury, executive vice president and general 
counsel, MCI Communications Corp., Washington, DC; William P. Barr, 
senior vice president and general counsel, GTE Corp., Stamford, CT; and 
Robert C. Atkinson, senior vice president, legal regulatory and external 
affairs, Teleport Communications Group, Inc., Staten Island, NY 44 

Panel consisting of Peter W. Huber, senior fellow, Manhattan Institute for 
Policy Research, New York, NY; Robert W. Crandall, senior fellow, Brook- 
ings Institution, Washington, DC; Ronald Binz, President, Competition Pol- 
icy Institute, Denver, CO; and Dale N. Hatfield, chief executive officer, 
Hatfield Associates, Inc., Boulder, CO 70 

ALPHABETICAL LIST AND MATERIALS SUBMITTED 

Atkinson, Robert C: 

Testimony 60 

Prepared statement 62 

Attachment 1 — Interconnection performance monitoring 64 

Attachment 2 — Summary of NYNEX performance for TCG (Jan. 

1994-March 1996) 64 

Barr, William P.: 

Testimony 58 

Prepared statement 59 

Binz, Ronald: 

Testimony 82 

Prepared statement 83 

Crandall, Robert W.: 

Testimony 75 

Prepared statement 77 

Ebbers, Bernard J.: 

Testimony 26 

Prepared statement 26 

Ellis, James D.: 

Testimony 15 

Prepared statement 16 

Attachment 1 — Background information about SBC and PacTel 22 

Attachment 2 — Trends in long distance rates and exchange access 

charges 23 

Attachment 3 — Competitive access providers in Southwestern Bell 
Telephone Company's territory 24 

(III) 



IV 

Page 

Hatfield, Dale N.: 

Testimony 90 

Prepared statement 91 

Huber, Peter W.: 

Testimony 70 

Prepared statement 72 

Salsbury, Michael H.: 

Testimony 44 

Prepared statement 46 

Thurmond, Hon. Strom: Prepared statement of David Turetsky 7 

Young, James R.: 

Testimony 11 

Prepared statement 12 

APPENDK 

Questions and Answers 

Responses of James R. Young to questions from: 

Senate Committee on the Judiciary 101 

Senator Thurmond 101 

Senator Leahy 103 

Senator Feingold 106 

Responses of James D. Ellis to questions from the Senate Committee on 

the Judiciary 107 

Responses of LDDS WorldCom to Senators' questions 108 

Responses of Robert C. Atkinson to questions from: 

Senator Hatch Ill 

Senator Thurmond Ill 

Senator Feingold 113 

Responses of Peter W. Huber to questions from: 

Senator Hatch 118 

Senator Thurmond 122 

Senator Leahy 123 

Responses of Robert W. Crandall to questions fi-om Senator Hatch 124 

Responses of Ronald Binz to questions from: 

Senator Hatch 124 

Senator Thurmond 125 

Senator Leahy 127 

Additional Submissions for the Record 

Prepared statement of Judy Brewer, Massachusetts Assistive Technology 
Partnership Center 128 

Prepared statement of Barbara O'Connor, California State University, De- 
partment of Communications Studies 129 

Letter to Senator Hatch from James Q. Crowe, chairman and chief executive 
officer, MFS Communications Company, Inc., dated Sept. 25, 1996 132 



MERGERS AND COMPETITION IN THE 
TELECOMMUNICATIONS INDUSTRY 



WEDNESDAY, SEPTEMBER 11, 1996 

U.S. Senate, 
Committee on the Judiciary, 

Washington, DC. 

The committee met, pursuant to notice, at 2:08 p.m., in room 
SD-G50, Dirksen Senate Office Building, Hon. Orrin G. Hatch 
(chairman of the committee), presiding. 

Also present: Senators Thurmond, Simpson, Grassley, Leahy, 
and Feingold. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 
SENATOR FROM THE STATE OF UTAH 

The Chairman. Good afternoon. I would like to thank our distin- 
guished panelists for joining us today for what I believe to be an 
illuminating and lively discussion and examination of recent devel- 
opments in the telecommunications industry. Telecommunications 
are a very basic, vital element of our daily lives, and at the same 
time represent one of the most dynamic and exciting arenas of 
American business today. 

From its very earliest days, telecommunications technology has 
literally revolutionized the way we lead our lives and conduct our 
business. Imagine how different our lives would be were we unable 
to telephone our families or fax documents to business associates. 

At the same time, we are today on the threshold, if not in the 
midst of what can truly be considered a revolution in the tele- 
communications industry. Moreover, this pace of technological 
change is matched by a breathtaking transformation in the com- 
petitive landscape of the telecommunications industry. In the wake 
of the Telecommunications Act of 1996, which promises to unleash 
previously constrained competitive forces in the telecommuni- 
cations industry, we read every day of new entrants into the tele- 
communications field, new joint ventures, mergers, and other busi- 
ness combinations which are working to reshape the whole tele- 
communications industry. 

Perhaps the most noteworthy of the developments since the pas- 
sage of the Telecommunications Act is the emergence of mergers 
between Bell Atlantic and NYNEX, SBC and Pacific Telesis, and 
WorldCom and MFS. All of these developments, of course, contrib- 
ute to a radically changing, competitive environment, and I believe 
it is important for this committee to exercise its antitrust oversight 
function to keep abreast of the transformations taking place in the 
telecommunications industry and to explore how the antitrust laws 

(1) 



should properly be applied in this emerging new telecommuni- 
cations age. 

Today's hearing is an important first step in exercising this over- 
sight function. By examining these three mergers, with my primary 
interest being their ramifications under antitrust law as well as 
their implications for consumers and for competition generally, this 
committee will gain a vivid snapshot of what is happening in the 
telecommunications field and, I hope, obtain further insight on the 
proper application of the antitrust laws in this context. 

While, of course, these mergers should and will be reviewed by 
the Department of Justice for a proper assessment under the anti- 
trust laws, I should point out that mergers are not in and of them- 
selves anticompetitive. In an era where we are seeing increasing 
globalization of telecommunications services, and in particular the 
emergence of large global compainies and alliances, mergers of do- 
mestic telecommunications firms may well help American compa- 
nies remain competitive in this international arena. 

Moreover, mergers may contribute significant cost savings and 
may play an important role in the trend toward combined services 
or, "one-stop shopping," for telecommunications services. All indica- 
tions are that we will see more and more major telecommuni- 
cations providers offering a full spectrum of services, including not 
just local and long distance, but video, cable, and information serv- 
ice technologies as well. 

Indeed, just today I read in the Wall Street Journal that AT&T, 
which many might think of as just a long distance company, has 
won what is reported to be the largest out-sourcing contract to 
manage a corporation's information services. This trend toward 
providing a broad range of telecommunications services under one 
roof, of course, will greatly benefit consumers and will in many in- 
stances depend on mergers or other business combinations. In de- 
veloping world markets, where domestic firms must compete, big is 
not necessarily bad when it comes to domestic mergers. Indeed, we 
will hear testimony today which may prove that certain mergers 
can, in fact, enhance competition. 

I believe that our hearing today will shed light on these and 
other issues, and I want to thank the distinguished panelists who 
have taken time from their busy schedules to join us. We will intro- 
duce our first panel of witnesses in just a minute, but let me just 
turn to Senator Leahy for any remarks he has for the minority. 

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 
FROM THE STATE OF VERMONT 

Senator Leahy. Thank you, Mr. Chairman. One of the self-pro- 
claimed achievements of the Congress was the new telecommuni- 
cations law. It was voted for by an awful lot of people in both par- 
ties and it was going to unleash the benefits of competition. I voted 
against the bill. I didn't believe that it would come up with that 
much competition. 

I said the day it passed on the floor that "Mega-mergers between 
telecommunications giants, such as the rumored merger between 
NYNEX and Bell Atlantic or the gigantic network mergers now un- 
derway, raise obvious concerns about concentrating control in a few 
gigantic companies of both the content and means of distributing 



the information and entertainment American consumers receive. 
Competition, not concentration, is the surest way to assure lower 
prices and greater choices for consumers. Rigorous oversight and 
enforcement by our antitrust agencies is more important than ever 
to ensure that such mega-mergers do not harm consumers." I said 
that then. 

Now, so far — and I reahze that the law is somewhat new, but the 
new telecommunications law has produced little competition in 
local phone service or between players that have traditionally acted 
in different segments of the industry. Outside of the Bell companies 
and GTE, independent phone companies still account for, I believe, 
less than 1 percent of the total market for local phone service. 
Competition from the cable companies for telephone service has not 
arisen, although that is not surprising. It has been my experience 
cable companies much prefer monopolies because it is easier to 
gouge the consumers than competition. 

The new technologies have yet to provide an effective competitive 
check on prices or to pressure improved services. Instead of this 
kind of competition, we have seen in the months since the law 
passed massive consolidation within the telecommunications indus- 
try. Within only 2 months of the bill's passage, four of among the 
biggest companies in this industry announced that they would not 
compete; instead, they would merge. Instead of seeing new entrants 
into every market, we are seeing old monopolies getting bigger and 
expanding their reach. 

As we are going to confirm today, concentration of ownership in 
the telecommunications industry is currently proceeding faster 
than the pace of competition. So my questions will be focused on 
trying to understand how these mergers are good for competition 
and for consumers. Perhaps they are. So far, those answers have 
escaped me, but I assume that somebody will enlighten me. 

When I wrote Chairman Thurmond back in April urging that we 
convene an antitrust hearing into mergers in telecommunications, 
that was my concern. I wanted to know why the companies in- 
volved feel that bigger is better. I wanted to know why the compa- 
nies involved chose to merge rather than to compete. 

The determination whether these mergers will go forward, and 
on what conditions, is a matter before the Department of Justice, 
which has the expertise to scrutinize this. One of the provisions we 
were able to preserve in the new Telecommunications Act was a 
very strong savings clause that continues to require that tele- 
communications mergers be reviewed in conjunction with our Fed- 
eral antitrust laws. 

The two mergers between the Bell companies will concentrate al- 
most 45 percent of all local phone lines in the country in the hands 
of just two companies. They will affect not only the millions of peo- 
ple who depend on the companies involved for an increasing array 
of advanced telecommunications services but also, of course, com- 
petition in the entire industry. 

I know that when I am at my farm in Middlesex, VT, or I am 
at my office here in the District of Columbia, or whether I am at 
the home I use during the session in Virginia, I still have only one 
choice for dial tone and local telephone service. That choice — well, 
actually, I have two choices. I have the choice of the Bell operating 



company or no service at all. The current mantra of the industry 
seems to be one-stop shopping, but if that one stop is at a monopoly 
that is not competing on price and service, I don't think it is the 
kind of one-stop shopping that consumers want. 

I am concerned that the distraction of these huge mergers will 
complicate and delay the companies' compliance with their new ob- 
ligations to open up their networks. That would not be good for 
competition in the local loop. I know that the Bell companies, the 
FCC, and the State regulatory agencies are in an area of transition 
and there is a lot of work to be done. But I am concerned that con- 
solidation, Mr. Chairman, is taking precedence over competition 
and may create additional barriers to effective competition. 

We have three different mergers before us today. About the only 
thing they have in common, of course, is the number of zeroes in 
the value of the deals. They are all huge, they are all in the bil- 
lions. What happens to NYNEX is very important to Vermont. It 
is one of the major employers in my State and provides most of the 
phone service to our State. I want to know where Vermont is going 
to fit in the priorities of a much bigger company. What does that 
mean for jobs, services, and telephone rates for Vermonters? 

But I also, Mr. Chairman — and this has to be a concern of yours 
and of Chairman Thurmond's — what do these things mean for 
rural areas? You have large rural areas in your States, as I do in 
mine. I know we are going to hear testimony that these mergers 
will generate operational efficiency and cost savings. That is a good 
thing, but local phone service is not competitive yet. We want to 
make sure the savings are passed on to ratepayers. Ratepayers are 
also important, not just the corporate officers and shareholders. 

Mr. Chairman, I am glad we are having this hearing. As I said, 
I may have overlooked as we went along some of the benefits of 
such mergers, but I am sure if they are present, they will come out 
at these hearings. 

Thank you. 

The Chairman. Thank you. Senator Leahy. Because of a wide va- 
riety of conflicts, I can't be here throughout the whole hearing and 
will only be here for a short period, but our chairman of the Anti- 
trust Subcommittee is Senator Thurmond and he will chair the 
hearing as soon as I leave. We are going to hear from him at this 
time, since he has such a vital role in this matter. 

Senator Thurmond. 

STATEMENT OF HON. STROM THURMOND, A U.S. SENATOR 
FROM THE STATE OF SOUTH CAROLINA 

Senator Thurmond. Thank you, Mr. Chairman, I want to thank 
you for proceeding with this hearing, despite obstacles and un- 
avoidable delays. As chairman of the Antitrust Subcommittee, I am 
pleased that you view this hearing as significant enough to merit 
the attention of the full committee. 

Fostering vigorous competition in the telecommunications indus- 
try through application of antitrust principles remains an impor- 
tant issue facing our Nation and deserves our attention. This is a 
time of rapid change, and even large telecommunications compa- 
nies worry about their continued health and survival. 



The purpose of this hearing is to examine how competition is de- 
veloping in telephone services following enactment of the Tele- 
communications Act by considering the three large pending merg- 
ers involving telephone services. Two of the mergers involve so- 
called Baby Bells. Last April, SBC Communications and Pacific 
Telesis stated their intent to merge. A similar announcement of 
Bell Atlantic and NYNEX quickly followed. These firms are four of 
the seven regional Bell operating companies created by the break- 
up of the Bell System in 1984 to provide local phone service in sep- 
arate regions of the country. 

Each of these four Bell companies already enjoys a dominant 
market position in local exchange services in its region, so the 
mergers will not increase their market shares, but simply result in 
much larger companies. Of course, the mergers will eliminate any 
chance of the merging pair competing with each other in the fu- 
ture, and some assert that these consolidations may make it more 
difficult for others to offer competing local phone services. 

The third merger represented here today is between WorldCom, 
the fourth largest long distance company, and MFS, which provides 
local access service to business customers in many cities. This 
merger, announced just 2 weeks ago, has generated interest be- 
cause of the potential of the combined company to provide end-to- 
end service to customers. The ability to offer a full range of tele- 
phone services from one source has been the driving strategy of 
many large telephone companies in recent years. 

These mergers are important because of the trend they may set 
or the pressure they may place on other companies to consolidate 
and become larger in order to be competitive. The role of the Con- 
gress is to oversee implementation of the Telecommunications Act 
to ensure that vigorous competition develops in areas where it has 
been unable to flourish in the past, particularly in local telephone 
service. However, it should be emphasized 

The Chairman. We have a vote on. I am sorry to interrupt Sen- 
ator Thurmond, but I will go vote and Senator Thurmond will fin- 
ish his statement. As soon as he is finished, we will recess until 
we can get back. 

Senator Thurmond [presiding]. However, it should be empha- 
sized that we are not here to determine the lawfulness of these 
pending mergers under the antitrust laws. That task is entrusted 
to the Antitrust Division of the Department of Justice. Under the 
applicable antitrust standard in Section 7 of the Clayton Act, the 
mergers can be modified or blocked only if their effect may be, 
"substantially to lessen competition." Open investigations into the 
Bell mergers prevent the Justice Department from sending a wit- 
ness to testify today. However, Deputy Assistant Attorney General 
David Turetsky has submitted a short written statement for inclu- 
sion in the record. 

Also I would like to enter into the record the statement of Sen- 
ator Simon. 

[The prepared statements of Senator Simon and Mr. Turetsky 
follow:] 



Prepared Statement of Senator Paul Simon, a U.S. Senator From the State 

OF Illinois 

When the telecommunications legislation became law earlier this year, its promise 
was to provide consumers with more choices, better service and lower prices. I voted 
against the legislation at the time because I didn't feel that it would achieve these 
important goals. I still don't. 

I commend the Chairman for holding hearings on mergers in the telephone-based 
telecommunications sector, but we should also examine the effects of the 1996 Act 
in another segment of the industry: radio broadcasting. 

One of the many problems with the new law is its complete elimination of na- 
tional radio ownership limits and tremendous relaxation of local radio station own- 
ership limits. Its provisions run contrary to the intent of the Communications Law 
of 1934, which was based, in part, on the fundamental principle that the pubUc 
owns the airwaves. The 1934 Act allows the FCC to grant broadcast station Ucenses 
only if it finds that doing so will further the "public interest, convenience and neces- 
sity." While this principle and this requirement do not mean that radio broadcasting 
cannot be run as a for-profit business, they do mean that these licenses are not a 
right, but a privilege. One of the duties that should continue to accompany that 
privilege is to serve the public interest of the community. The 1996 Act cuts radio 
programming loose from the moorings of the public interest and potentially sets it 
adrift in a sea of nationally homogenized programming that serves only the interest 
of big corporate radio owners in search of advertising dollars. 

In less than two weeks after enactment of the 1996 Act, almost $1.4 billion in 
radio properties changed hands. By July there had been $5.2 billion in radio deals. 
In the July 8, 1996 Investment Dealers Digest, Joseph Zimmel of Goldman, Sachs 
& Company said of the deals, "[t]hey want more outlets in the same market so they 
have a more powerful story to offer advertisers." A more powerful story to offer ad- 
vertisers? That says it all. 

Group station owners argued that the prior to the 1996 Act, ownership caps sti- 
fled radio's ability to grow and its ability to draw a profitable share of advertising 
revenues. But the likely effect of the relaxation of the limits is echoed in the words 
of an American Radio Systems Company executive David Pearlman who said in the 
February 5, 1996 Broadcasting & Cable magazine, all companies wiU have to make 
the decision whether to get big or get out." 

Two of the companies moving to get even bigger are Westinghouse and Infinity, 
which with their proposed merger, would own 83 radio stations — 69 of which are 
in the top markets — with combined revenue of $1 bilUon dollars and eight percent 
of the radio industry's total advertising revenue. This deal would not have been pos- 
sible without the station ownership changes made in the Act. 

In the first edition of Ben Bagdikian's "Media Monopoly" (1983), he documented 
the rapid increase in concentration of media ownership by national and multi- 
national corporations that "control what America sees, hears and reads." At that 
time, 50 corporations earned more than half of all revenues derived from the dis- 
semination of information. In the most recent edition of Mr. Bagdikian's book 
(1992), he found there were just 20 firms that earned more than half of such reve- 
nues. 

This increased concentration raised the obvious concern about diversity in broad- 
casting, a hallmark of the radio industry. As the companies "get big" programming 
tends to get more generic. As stated by Robert Unmacht, the editor of the radio in- 
dustry newsletter, the M Street Journal, "I feel sorry for the listeners * * * finding 
a creative and interesting radio station will be harder because the pressure is on 
to make them very much alike." For instance, since 1994, five of New York's FM 
stations switched their format to modem rock. An Infinity-owned station, WXRK, 
was a classic rock station until earlier this year when it too switched to a modem 
rock format. 

When a company owns many stations in one market, it can offer package adver- 
tising deals to that smaller owners can't offer. They can also cross-promote their sta- 
tions. The end result is that they will have the power to force smaller owners out 
of business. That will leave listeners with fewer voices, less diversity and, probably, 
less localism. 

Last month, the Justice Department approved the $774 million merger of radio 
group owners Jacor and Citicasters Inc. This merger, along with other pending 
mergers involving Jacor, would give it 51 stations in 15 major markets. The Depart- 
ment ruled, however, that Jacor could not maintain the 53% share of advertising 
dollars it would have acquired in Cincinnati and ordered them to divest down to 
a 50% share. The Department believed that without the divestiture, Jacor would 



have eliminated all of the competition between the stations and advertisers would 
have been forced to pay higher rates. 

It is my hope thai as the Justice Department continues its review of these radio 
mergers for their anti-competitive effect, that, to the extent appropriate, it will also 
consider the direct effect on the listening audiences. 

I am a cosponsor of legislation to restore the radio ownership caps in place prior 
to passage of the Act. The biU is now pending in the Commerce Committee. Through 
I am realistic about the odds of this legislation moving this year, I am hopeful that 
there will be a legislative fix at some point in the near future. While restoring own- 
ership caps to their previous limits will correct only one of the bill's many flaws, 
it is certainly a step in the right direction. 



Prepared Statement of David Turetsky, Deputy Assistant Attorney General, 
U.S. Department of Justice 

The Department of Justice appreciates the opportunity to share its perspective on 
the outlook for competition in the telecommunications industry, and the Depart- 
ment's crucial role in preserving competition in the telecommunications industry, in 
the wake of enactment of the Telecommunications Reform Act of 1996. 

Competition is clearly the first guiding principle and the immediate objective of 
the new law. By removing a number of legal and regulatory obstacles to competi- 
tion, the new law makes more competition possible. We need to ensure that such 
potential is realized by ensuring that anticompetitive conduct and combinations do 
not set up new roadblocks. The changes in the law, the regulatory framework and 
the other changes in the industry, particularly changes in technology, make anti- 
trust enforcement not only more challenging, but also even more important. 

The mission of the Antitrust Division and the antitrust laws in the new and 
changing world of telecommunications is the same as our mission has always been — 
protecting and promoting competition. Keeping markets free and open has always 
been the mission of the Antitrust Division, and it is a mission which has always 
enjoyed strong bipartisan support. The Antitrust Division has a tremendous record 
of achievement in the telecommunications area, including fostering competition 
through the break-up of AT&T in 1984. Since that action, prices to consumers for 
long-distance, manufacturing, and information services have dramatically declined 
and innovation has been spurred. This more competitive environment has positioned 
our nation's telecommunications sector to successfully compete throughout the 
world. 

I will give particular emphasis in this statement to our merger enforcement work, 
as an unprecedented wave of telecommunications mergers has been occurring since 
the passage of the Act and is expected to continue. Of course, we will also be enforc- 
ing the Sherman Act against restraints of trade or illegal monopolization of any 
telecommunications market, as well as consulting with the FCC regarding applica- 
tions by the Bell companies to enter the long distance business, in accordance with 
section 271 of the new law. But merger enforcement promises to be a major focus 
of our telecommunications work in the foreseeable future. We will need to devote 
a significant portion of our resources to this task. 

merger enforcement 

The Antitrust Division reviews proposed mergers under section 7 of the Clayton 
Act for their possible anticompetitive effects. The new Telecommunications Act not 
only preserved this important role, but also expanded it by eliminating section 
221(a) of the Communications Act of 1934 which immunized mergers between tele- 
phone companies from antitrust review if approved by the FCC. We are grateful to 
the members of this Committee who recognized that section 221(a) was not in keep- 
ing with the competitive market basis of the Telecommunications Reform Act and 
successfully worked to remove it. 

The new law has spawned an unprecedented wave of telecommunications industry 
mergers, acquisitions, and joint ventures, including among some of the largest and 
most prominent firms in the industry. Not only has the total volume of our workload 
substantially increased, but, because of the new possibilities presented by the new 
law, the telecommunications-related mergers that are occurring are different and 
more complex than previous mergers in this industry. As a result, we need to devote 
virtually unprecedented resources to reviewing the competitive aspects of these cor- 
porate unions. Nevertheless, with continued congressional support, I am confident 
we will continue to be able to fully protect competition and consumers from anti- 
competitive results. 

Many of the mergers are said to be taking place in preparation for changes in the 
marketplace expected to result from enactment of the new law. Others are mergers 



8 

that were legally precluded before enactment — such as by regulatory limitations on 
the number of radio stations a single firm can own. 

Of course, I am not at liberty to comment specifically on any of the proposed 
mergers that may be currently under review by the Antitrust Division. But citing 
a few indicia of this merger wave that have been reported publicly in the press dur- 
ing the past couple of months helps show its significance. 

According to press reports, the three announced proposed mergers involving Bell 
operating companies alone have a combined estimated value of $48 billion. There 
are also mergers between non-Bell Operating Companies that provide telephone 
service that have been proposed. The potential competitive consequences from all of 
these mergers must be fully assessed, and we are in the middle of these reviews 
right now. 

The changes discussed above have also spurred numerous TV and radio station 
acquisitions. According to press reports, thus far this year alone, TV station acquisi- 
tions have totaled an estimated $7 billion in value. Radio station acquisition deals 
announced this year, 189 in number, have totaled an estimated $25.6 billion in 
value. We have already filed one case, Jacor Communications, in which we alleged 
that a radio station acquisition violated section 7 of the Clayton Act, and ciurently 
we are reviewing several other proposed acquisitions raising competitive issues. 

And this is only the beginning. The new law is barely seven months old. The regu- 
lations to implement it are just beginning to be finalized. 

All this is taking place against the backdrop of record merger activity throughout 
our economy. According to recent press reports, last year set a merger record at 
$502 billion total value. And as of a month ago, this year's rate was out-pacing last 
year's rate by almost 15 percent. 

We intend to be vigilant in performing our merger enforcement responsibilities, 
and we appreciate the continued support of Congress. The Antitrust Division will 
be closely monitoring transactions in the telecommunications industry — as we must. 
Developments in the communication of information will not only have a profound 
and immediate impact on virtually all consumers, but will likely be the catalyst for 
innovation and productivity growth in the economy well into the next century. 

Sound and reasoned merger enforcement is needed to ensure that competition 
continues and grows as telecommunications markets are restructured. Competitive 
markets are crucial for maximizing the development of innovative technologies and 
services and for providing consumers with the widest possible range of choices at 
the lowest possible prices. So it is crucial to prevent mergers that would dampen 
the competitive impulse or that would limit market access by competitors. Con- 
sequently, we will be subjecting proposed mergers in the telecommunications indus- 
try to the full rigorous scrutiny required by law. And, if there is significant evidence 
that a merger is likely to result in competitive harm, we will challenge it, and we 
will structure our proposed remedy to prevent that harm. 

CONCLUSION 

The world of telecommunications is changing dramatically. Passage of the new 
law ushers in a challenge to shift the fundamental paradigm from regulation to 
competition as the core of our telecommunications policy. That is a shift that we in 
the Antitrust Division welcome and will continue to support and encourage. 

As the regulatory moorings that have held the structure of this industry in place 
for the better part of a century are being cut, there will be many new business op- 
portunities, and ultimately new products, services, and combinations that perhaps 
even the most visionary among us may not yet foresee. The job of antitrust enforces 
in the face of such dramatic change is to safeguard the competitive marketplace that 
will enable these positive developments to unfold. That will make the new law's 
promise a reality, and maximize the resulting benefits for consumers and our econ- 
omy. 

Senator Thurmond. It is instructive to note that the purpose of 
our antitrust laws is not to favor one group over another, but to 
utihze objective principles to encourage competition for the benefit 
of consumers. Proper application of antitrust principles ensures 
that competition flourishes and that Americans enjoy the highest 
quality goods and services at the best possible prices. If antitrust 
principles are neglected, however, competition is likely to suffer 
and we risk avoidable concentration of market power, leading to in- 



flated prices, less innovation, and erosion of our Nation's competi- 
tive standing. 

Our antitrust laws shield American markets from economic dis- 
tortions by fostering healthy competition, so that companies rise or 
fall on their merits rather than through abuse of market power and 
other anticompetitive practices. In short, antitrust law is both 
proconsumer and probusiness. 

The Telecommunications Act of 1996, which we passed in Feb- 
ruary, is one of the few pieces of legislation that can truly be de- 
scribed as "landmark." Under the vigorous leadership of Senator 
Pressler, chairman of the Commerce Committee, our Nation's basic 
communications law was overhauled for the first time in 60 years, 
while ensuring that mergers like those being discussed today re- 
main fully subject to our antitrust laws. 

Senator Pressler has correctly stated that the intent of the act 
is to achieve lower prices and better services through more com- 
petition, less Government regulation, and the broader operation of 
market forces. The fundamental reason for this hearing, and the 
challenge before us, is to ensure that the promise of the Tele- 
communications Act is realized for the benefit of consumers. In this 
regard, when the Bell mergers were announced I personally called 
in the CEO's to express concern that local rates for consumers 
should not increase. 

The ultimate impact of the Telecommunications Act depends on 
its implementation in the marketplace. While the act and its regu- 
lations are intended to produce vigorous and sustained competition 
for the benefit of American consumers, achievement of this goal can 
only be measured in the real world. As the marketplace responds 
to the act and other developments, significant changes in the shape 
and composition of the telecommunications industry are inevitable. 

In addition to the three mergers we are examining today in the 
area of telephone services, many other large telecommunications 
mergers are occurring in cable, radio, and other areas. This trend 
of mergers, joint ventures, and other business alliances is certain 
to continue in the future. At the same time, the telecommuni- 
cations industry is swelling with large numbers of new entrants. 
While it is impossible to predict the future, I look forward to hear- 
ing the views and best estimates of our witnesses today about the 
development of the telecommunications world over the next few 
years. 

As our Nation is a free-market economy, the Government should 
not block or resist the reorganization of firms seeking better ways 
to provide services to consumers unless such moves are anti- 
competitive. In many cases, mergers will be procompetitive, result- 
ing in efficiencies and better services at lower prices for consumers, 
and the application of antitrust principles by the antitrust enforce- 
ment agencies should so reveal. 

Although mergers between dominant parties routinely receive 
tough antitrust scrutiny, mergers between smaller players are not 
likely to face problems under the antitrust laws. For example, the 
proposed merger between WorldCom and MFS appears likely to 
create a more effective but nondominant competitor which, to my 
knowledge, has not raised any antitrust concerns. 



10 

Less than a year-and-a-half ago, I chaired a hearing on antitrust 
issues in the pending telecommunications bill. Remarkable 
progress has been made since that time, but we must not sit back 
and view our work as complete. This is a vital period which will 
determine whether widespread competition can be achieved in local 
telephone services. Until healthy competition arrives in all tele- 
communications markets, consumers will not reap the full benefits 
of the Telecommunications Act. 

I want to thank each of the witnesses for their time and effort 
in appearing before the committee this afternoon, and expect that 
they will be very informative. 

Now, we will stand in recess until the chairman returns. At that 
time when we take up the witnesses we will allow 5 minutes for 
each witness. They can put their entire statements in the record, 
but we have so many witnesses, we have to limit them to 5 min- 
utes. 

[Recess.] 

The Chairman. Our first panel of witnesses today are executives 
from telecommunications firms who have announced mergers. 
First, we will hear from Mr. James Young, who has been vice presi- 
dent and general counsel for Bell Atlantic Corp. since 1992. After 
Mr. Young, the committee will hear from Mr. James Ellis, who has 
been the senior executive vice president and general counsel for 
SBC Communications since 1989, and Mr. Bernard J. Ebbers, 
president of LDDS WorldCom, will finish the first panel. Mr. 
Ebbers has been president of LDDS WorldCom since 1985. 

Now, let me just announce that the second panel consists of 
three more industry executives. Mr. Michael Salsbury is executive 
vice president and general counsel for MCI Communications. Wil- 
liam Barr is before us today as senior vice president and general 
counsel for GTE Corp. Mr. Barr, of course, is a former attorney 
general and is a familiar face to many around here, so we welcome 
you back to the committee, General Barr. Mr. Robert Atkinson, 
senior vice president for legal, regulatory and external affairs for 
Teleport Communications Group in Staten Island, NY, will finish 
up that distinguished panel. 

Then in our final panel today, we will hear from four distin- 
guished telecommunications experts. First up will be Mr. Peter 
Huber, a senior fellow from the Manhattan Institute. He is an ex- 
pert in telecommunications markets and antitrust policy. Mr. Rob- 
ert Crandall is a senior fellow at the Brookings Institution here in 
Washington, DC. He brings us expertise in telecommunications 
regulation. 

Mr. Ronald Binz is president and policy director of the Competi- 
tion Policy Institute. He is an expert on competition policy and 
consumer issues in the telecommunications industry. Mr. Dale Hat- 
field is the chief executive officer of Hatfield Associates and he will 
be the final witness today. Mr. Hatfield also brings us expertise in 
telecommunications policy. 

So I would like to thank all of these distinguished witnesses for 
taking time to be with us today. Because we have so many wit- 
nesses testifying, I would ask that each of you — Senator Thurmond 
undoubtedly already has — limit your testimony to 5 minutes per 
witness. We will put all statements in the record as though they 



11 

were fully delivered, and if you can summarize in 5 minutes, we 
would appreciate it. The red light means you should quit as soon 
as that comes on. 

So we will turn first, then, to Mr. Young. 

PANEL CONSISTING OF JAMES R. YOUNG, VICE PRESIDENT 
AND GENERAL COUNSEL, BELL ATLANTIC CORP., ARLING- 
TON, VA; JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESI- 
DENT AND GENERAL COUNSEL, SBC COMMUNICATIONS, 
INC., SAN ANTONIO, TX; AND BERNARD J. EBBERS, PRESI- 
DENT AND CHIEF EXECUTIVE OFFICER, LDDS WORLDCOM, 
JACKSON, MS 

STATEMENT OF JAMES R. YOUNG 

Mr. Young. Ck)od morning, Mr. Chairman. My name is James 
Young and I am general counsel of Bell Atlantic. I would like to 
thank you and the committee for the opportunity to appear before 
you this afternoon because I would like to take Senator Leahy up 
on his offer. I want to have the chance to explain to you why our 
merger is procompetitive, why it is good for consumers, why it is 
good for employees. 

I would like to touch first, if I could, in my remarks, here on the 
fact that the new Bell Atlantic will be a good competitor. I want 
to focus first on a point that Senator Leahy raised. As required by 
the Telecommunications Act of 1996, we will continue to open our 
network to facilitate competition in the local services businesses. 

It may not be evident to members of the committee, but a lot of 
the hard work of implementing the Telecommunications Act is 
going forward. We have negotiated a number of interconnection 
agreements. We are providing unbundled network elements, as the 
act requires. A lot has gone on. It may not be visible, but the act 
is working. 

In addition, though, and maybe even more important, we intend 
to fulfill the promise of the act by bringing competition to the do- 
mestic long distance market, a market that has been dominated by 
a cartel for the last several years. We expect that the combined 
Bell Atlantic-NYNEX will be a better competitor than either of the 
individual companies would have been alone. 

We also will be a strong competitor for cable. Consumers want 
choice in cable and we are determined to provide that choice, and 
as well in the emerging market for Internet and Internet access 
services. In these areas, consumers will see more choices, better 
prices. We are also committed to good service. With competition 
coming to our business the way the Telecom Act of 1996 dictates, 
we don't have any other choice. 

One brief note on the reasons behind the merger. I don't think 
it comes as any secret to the members of this committee that today 
the telecommunications marketplace is dominated by very large 
companies. Individual companies such as AT&T, Nippon Telephone 
and Telegraph, Deutsche Telekom are all larger than our new 
merged company will be. In fact, even after its divestiture, AT&T 
will be twice the size of the merged Bell Atlantic-NYNEX. 

Now, these giant companies are, over and above their initial size, 
forming into even larger alliances to compete in the telecommuni- 



12 

cations marketplace. There is the AT&T-led World Partners. There 
is MCI's lash-up with British Telecom. There is the Global One or- 
ganization that consists of Sprint, France Telecom, and Deutsche 
Telekom. These aren't ephemeral alliances; they are very perma- 
nent arrangements. British Telecom has poured billions into MCI. 
The European partners have poured billions into Sprint. These are 
very permanent arrangements. 

These companies are very logical challengers for the new Bell At- 
lantic and we are a very logical company to provide more competi- 
tion to them. Indeed, AT&T has recently announced that, with the 
Telecom Act of 1996, they believe they will have 35 percent of the 
local exchange market in this country in a matter of only a few 
years. 

Mr. Chairman, as you pointed out, this committee is concerned 
with antitrust issues. In my testimony, I have attempted to deal 
with what I think is one of the principal antitrust issues raised 
about the merger, and that is. Would Bell Atlantic and NYNEX 
have competed with each other if not for the merger? I have at- 
tempted to deal with this in detail in my written testimony. Let me 
just make a couple of points. 

First, as Senator Thurmond noted, we are today — we do not com- 
pete with NYNEX. We are not in the same markets and we have 
no plans to compete with each other. So there is absolutely no over- 
lap between the two companies. 

Second, as I noted, the Telecommunications Act is working. 
There is a large number of companies that are eager to get into my 
local exchange markets and that are eager to get into NYNEX' 
local exchange markets. Even in Vermont, for example, Hyperion 
has negotiated an interconnection agreement to provide local ex- 
change service. So there is plenty of competition. 

If I could summarize my views on this merger in just one 
thought, it would be this. A year ago. Bell Atlantic and NYNEX put 
together their cellular companies to provide better service to cus- 
tomers. Now, a year later, by merging those two companies, we are 
providing better service at better rates, and in terms of jobs the 
new combined company has more jobs than either of the two com- 
panies did before. By putting together Bell Atlantic and NYNEX, 
the telephone companies, we are going to do the same thing. 

Thank you, Mr. Chairman. 

The Chairman. Is that more jobs in both of the two companies 
than before? Is that what you meant to say? 

Mr. Young. Yes. 

[The prepared statement of Mr. Young follows:] 

Prepared Statement of James R. Young 

Good morning, Mr. Chairman and members of the Committee. My name is James 
Young, and I am General Counsel of Bell Atlantic Corporation. After the merger, 
I will be General Counsel of the new Bell Atlantic. 

I want to thank you for the opportunity to appear before this Committee today 
to discuss this merger. In my testimony, I would like to show you that consumers 
stand to benefit from the greater competition and innovation that the merged com- 
pany will be able to bring to the telecommunications marketplace, both in this coun- 
try and worldwide. 

This merger is the result of the astounding changes that have occurred in the 
telecommunications industry in recent years. The Information Age is here, brought 



13 

to us by the technological advances we read about every day, either in old-fashioned 
newspapers or in e-zines on the Net. 

Technology has changed the legal and regulatory paradigms in this industry. 
There are no more exclusive franchises, for cable or telephone companies. No one 
is guaranteed a "fair rate of return." Markets are truly global, not local. These 
changes offer us opportunities to expand beyond our traditional businesses. At the 
same time, they offer others, often firms or alliances with resources greater than 
ours, the chance to go after the business that we have long counted on. 

The territories served by Bell Atlantic and NYNEX are among the most attractive 
for these competitors to attack. And this competition is well underway from some 
of the worlds' largest companies, including AT&T, SBC, Time Warner and the com- 
bination of British Telecom and MCI. AT&T alone has said that it will take one- 
third of the local service business. We need to match their resources and their skill 
if we are to succeed. 

REGULATORY STATUS AND HISTORY 

Before I tiu*n to the benefits of the merger, let me tell you where we are in going 
through all the regulatory approvals that we need in order to consummate this 
merger. We made our Hart-Scott-Rodino filing on May 1, received a second request 
from the Department of Justice on May 31 and substantially complied with that re- 
quest in July. 

On July 3, we filed with the Federal Communications Commission applications to 
transfer various FCC licenses. The Commission has issued a public notice asking 
for comment on the applications later this month with rephes due in late October. 

At that same time, we filed papers with the state utility commissions in all 14 
jurisdictions in which Bell Atlantic and NYNEX provide local service, advising them 
of our plans or, where required by State law, seeking their approval of the trans- 
action. Three State commissions have already indicated that they have no need to 
look any further at the merger. 

At this point, neither a State or federal regulatory agency, State antitrust or 
consumer protection authority, nor the Department of Justice has indicated that it 
will oppose or otherwise attempt to block the Bell Atlantic-NYNEX merger. 

That is where we are today in the approval process. Now let me take us back a 
few years to the breakup of the Bell System in 1984, the court-approved divestitiu-e 
that gave birth to both Bell Atlantic and NYNEX. At that time, there was nothing 
magical about there being seven Baby Bells. The MFJ neither required nor prohib- 
ited the consolidation of the ownership of the Bell companies into any particular 
number of entities. AT&T proposed to distribute its 20-plus local telephone compa- 
nies among seven holding companies largely for administrative convenience. The 
Department of Justice agreed, and the court approved their plan. 

This decision was not guided by antitrust concerns. In early 1982, before the deci- 
sions was made, the head of the Antitrust Division, Professor Baxter, told the Sen- 
ate Commerce Committee that there might be any number of local Bell companies 
and that he "would not be greatly alarmed by a single operating company." If a sin- 
gle nationwide operating company posed no antitrust risk then, the combination of 
two of the seven holding companies surely can pose no risk now that all tele- 
communications markets are far more competitive. 

THE MERGER WILL BENEFIT THE PUBLIC 

But that's enough of the past. Let's look at what will happen in the future. The 
new Bell Atlantic will be a strong company, well positioned to compete with the tele- 
communications giants of the world. Individual companies such as AT&T, Nippon 
Telephone and Telegraph and Deutsche Telekom are all larger than the merger 
company will be. Even after AT&T's divestiture, it will be twice as large as the new 
Bell Atlantic. These international giants are also teaming up into global alliances 
like the AT&T-lead World Partners, MCI's and British Telecom's Concert, and Glob- 
al One of Sprint, France Telecom and Deutsche Telekom. These arrangements are 
not merely ephemeral alliances that will come and go. British Telecom has invested 
$4.3 billion in MCI in return for a 20 percent stake in the company, an ownership 
interest comparable to what France Telecom and Deutsche Telekom received in ex- 
change for their $3.7 billion investment in Sprint. 

The location of the new Bell Atlantic, serving both the political and financial cap- 
itals of the United States, makes the company a natural target of — and challenger 
to — these multinational powerhouses. Bell Atlantic and NYNEX customers make 
about 35 percent of the international calls from the United States, and we want to 
be able to begin to provide competition for these customers' business. 



14 

The new Bell Atlantic will be a good competitor at home. First, we will complete 
the opening up of our network to facilitate local service competition, as required by 
the Telecommunications Act of 1996. Although we may disagree with many aspects 
of the FCC's order implementing those provisions of the Act, we are moving ahead 
to comply with it. And at least as important, we intend to fulfill the promise of the 
Act by bringing competition to the domestic long distance market that has been 
dominated by AT&T, MCI and Sprint. We expect that the combined Bell Atlantic/ 
NYNEX will be a better competitor than either company could have been on its own. 

We also will be a strong competitor against the incumbent cable companies and 
in the emerging marketplace for Internet and Internet access services. 

In all these areas, competition will bring consumers more options than they have 
today and hold down the lower prices they have to pay. 

THE MERGER WILL NOT IMPEDE COMPETITION OR HARM THE PUBLIC 

This merger will clearly not recreate the old Ma Bell, as some critics have sug- 
gested. While we will be a large company, we will not even be the largest tele- 
communications provider in the United States. We plainly will not remotely ap- 
proach being the monolith that was the old AT&T, which dominated every facet of 
telecommunications, from equipment manufacturing to local service and long dis- 
tance. We will be a new entrant, with virtually a zero market share of the 
interLATA long distance business. In our local markets, the merged company will 
begin its Ufe as the largest provider, but the reforms required by the Telecommuni- 
cations Act and State commission orders will cause us to face competition that the 
old Ma Bell never dreamed of And because our competitors in this marketplace will 
be large, well financed companies such as AT&T and MCI, we will have a real fight 
on our hands — a fight which, I must add, consumers can only benefit from. 

Nor will this merger eliminate or substantially reduce competition in any line of 
commerce. The combination of the two companies will still leave ample numbers of 
providers in every segment of the telecommunications marketplace. 

For example, some argue that Bell Atlantic and NYNEX could have competed in 
each other's territories in offering local exchange services. There are already numer- 
ous firms competing or ready to compete for consumers' business — more than twenty 
competitive local exchange and access service providers in New York, and only a few 
less in New Jersey. Consumers in these states will have a wide range of good 
choices even without the separate participation of both Bell Atlantic and NYNEX. 

While Bell Atlantic could have competed in New York State, we have no special 
advantage that would have caused us to enter the New York market in the absence 
of the merger. In this connection, it is important to remember that Bell Atlantic has 
been free to go into New York for the last ten years, and it has chosen not to do 
so. 

Bell Atlantic would have no special advantage as a competitor in New York. Bell 
Atlantic has no facilities in New York and it could not readily use its facilities in 
New Jersey to compete on the other side of the Hudson River. In contrast, many 
other companies — including AT&T, MCI, Sprint, Time Warner, Teleport, and MFS-— 
already have switches and transport facilities in place. 

Bell Atlantic is contiguous with NYNEX only in the New York City area, as most 
of the area along the border between New York and Pennsylvania and New Jersey 
is served by unaffiliated telephone companies. The New York City area is already 
one of the most intensely competitive telecommunications markets in the country. 

Unlike many other telecommunications service providers, Bell Atlantic has no cus- 
tomer base in New York, no network of sales offices or customer service centers. 
Other firms, especially those who have long engaged in national marketing efforts, 
have greater name recognition in New York than does Bell Atlantic, in spite of the 
geographic proximity. 

1 am not the only one who thinks that Bell Atlantic should not be considered a 
potential competitor in the local exchange business in New York — the FCC has 
reached the same conclusion. When the Commission recently waived certain pricing 
rules applicable to NYNEX because of the "increasingly competitive" character of 
the market in the New York City area, its discussion of current and expected com- 
petition did not even mention Bell Atlantic' 

This view of the marketplace is consistent with that held by others in Govern- 
ment. In discussion after discussion, including testimony before Congress, the Ad- 
ministration cited long distance carriers, cable operators, competitive access provid- 
ers and wireless providers as the source of competition for the Bell companies. 



'NYNEX Telephone Cos., 10 FCC Red 7445 (1995). 



15 

These analyses do not even mention other Bells as providing competition outside 
their existing territories.^' 

Nor will the merger impede in any way the ability of new entrants to come into 
our local markets. The framers of the Telecommunications Act did their job well in 
writing requirements for the opening up of local markets to competition. And by 
making this opening up a prerequisite for our getting interLATA authority from the 
FCC, they gave us every incentive to get on with the job and to get it done. 

Some skeptics have suggested that the merger will cause our customer service to 
deteriorate. This is not so. We remain committed to providing all our customers the 
highest quality service possible. The new Bell Atlantic will draw on the best ideas 
of each company to improve overall service and customer satisfaction. If we are to 
succeed in the marketplace of tomorrow, we must provide good customer service. 

This merger is not only good for consumers, it will also benefit our employees. The 
merger will not cause a single bargained-for employee to lose his or her job. Both 
companies will, of course, honor existing labor contracts. While we do expect to be 
able to consolidate a number of administrative and corporate functions, the Tele- 
communications Act opens up new opportunities for us and our employees to move 
into new areas. The senior management team is committed to acting responsibly to 
all our employees and will pursue redeployment of people whose jobs are affected 
by the merger. 

Thank you. 

The Chairman. Mr. Ellis. 

STATEMENT OF JAMES D. ELLIS 

Mr. Ellis. Mr. Chairman, I am Jim Ellis, representing South- 
western Bell, SBC Communications. I am delighted to be here to 
talk about our merger with Pacific Telesis, and also to comment 
briefly on the state of telecommunications competition. 

With respect to the merger, I would say first of all that we be- 
lieve very strongly that the combined company will be good for con- 
sumers, for our employees and for our shareholders. With r'^spect 
to this combined company, it is going to be one that is going to be 
stronger financially. It is going to have better resources, it is going 
to have efficiencies, it is going to have scale, and it is going to have 
the management talent to compete against the very large competi- 
tors that are out there, the large national and multinational com- 
panies. 

They are household names. Jim Young has just mentioned some 
of them, but certainly they are much larger than SBC and in some 
cases they are larger than the combined SBC and Pacific Telesis — 
names like AT&T and MCI and British Telecom, Time Warner, and 
I could go on. In addition to those, there are hundreds of other 
competitors already indicating that they intend to compete in Cali- 
fornia and in our five States where SBC operates today. 

With respect to the antitrust issues, we feel very strongly that 
this merger is not anticompetitive. It is procompetitive. To put it 
in the Clayton Act terms that I believe Senator Thurmond talked 
about before, there is nothing about this merger that will substan- 
tially lessen competition. We are not competitors of Pacific Telesis 
and they are not our competitors today. Beyond that, we are not 
potential competitors of Pacific Telesis and they are not potential 
competitors of ours. 

It is clear under the law you look at the plans of both companies. 
Our plans that preceded this merger by a long time show clearly 



2 E.g., Memorandum of the United States in Support of MFJ Modification to Permit Limited 
Trial of Interchange Service by Ameritech, United States v. Western Elec. Co. (D.D.C. 1995); 
Comments of United States Department of Justice at 36, FCC CC Dkt. 96-98 (May 16, 1996); 
Statement of Anne K. Bingaman Before the Senate Commerce Committee, March 3, 1995. 



16 

our intentions were not to compete with Pacific Telesis, and vice 
versa. Given that, there is nothing about this merger that will 
eliminate an actual competitor or a potential competitor. I would 
say further, even if we were potential competitors, which again we 
are not, there are substantially more competitors in this market 
than the three that the Justice Department guidelines look to. 

Now, with respect to the issue of telecommunications competi- 
tion, in general, I will try and be brief and simply point out, as the 
committee knows, that in January of 1996 the new Telecommuni- 
cations Act was passed and the President signed it in February. 
That act had as its centerpiece the deregulation of telecommuni- 
cations and the opening of all markets to all competitors. It was 
supposed to work on the basis of private negotiations under the 
auspices of the States. Where necessary, there would be mediation 
and, beyond mediation, arbitration, again under the auspices of the 
States to introduce competition across the local exchange markets. 

The FCC released an order last month and it was anything but 
deregulatory. In fact, what the FCC has done is essentially pre- 
empted the State regulation of local exchange competition, some- 
thing that for generations has been the subject of State jurisdic- 
tion. The FCC has come in and taken 8 or 9 pages of the statute 
and written an almost 700-page decision, with 3,200 footnotes — 
an3^hing but deregulatory. Along the way, they have preempted 
the regulation authority of the States over local exchange. I am not 
talking long-distance; local exchange telephone service. 

They have preempted private negotiations, and they have also 
set in place a pricing scheme that has the effect of subsidizing 
many of the large companies that I have just ticked off here, and 
at the same time confiscating the property of others. At a mini- 
mum, this decision has cast a cloud over the implementation of the 
Act. It has already prompted, not surprisingly, a lot of litigation. 
We have seen four or five appeals filed already, and I think, at 
best, it is going to create uncertainty. At worse, it is going to re- 
quire expenditure of funds. Ultimately, we are going to have to 
start over, when I believe the commission's decision is going to be 
reversed. 

Thank you, Mr. Chairman. 

The Chairman. Thank you, Mr. Ellis. As I understand it, you are 
saying that neither of the merging companies here were competi- 
tors or were likely to become competitors. 

Mr. Ellis. That is correct, sir. 

[The prepared statement of Mr. Ellis follows:] 

Prepared Statement of James D. Ellis 

My name is James D. Ellis. I am the Senior Executive Vice President and General 
Counsel of SBC Communications Inc. ("SBC"). At the outset, I want to thank Sen- 
ator Hatch and the members of this committee for their interest in the state of com- 
petition in the telecommunications industry, including the proposed merger of SBC 
and Pacific Telesis Group ("PacTel").> 

My testimony is divided into two parts. In the first part, I will focus on the 
planned merger between SBC and PacTel. The merger raises no concerns under this 
nation's antitrust laws, and is in the interest of the customers, employees, and 
shareholders of both companies. The second part of my testimony will focus on the 
state of competition in the telecommunications industry. 



^Attachment 1 contains more information about SBC and PacTel. 



17 

I. THE SBC/PACTEL MERGER 

A. Background information concerning the SBC / PacTel merger 

On April 1, 1996, SBC and Pacific Telesis Group announced that the two had 
agreed to merge into a single company to be known as SBC Communications Inc. 
The combined company will ofTer telecommunications products and services under 
the brand names of Southwestern Bell, Pacific Bell, Nevada Bell, and Cellular One. 

The SBC/PacTel merger will combine two of the smallest regional Bell companies 
into a single company. The merger is designed to draw upon the strengths of both 
SBC and PacTel, in order to create a single company capable of more effectively 
meeting the challenge of the new competitive telecommunications environment. SBC 
has a proven track record in product development, in marketing and sales of tele- 
communications products and services, in providing wireless services, in revenue 
and net income growth, and in increasing shareholder value. PacTel is a leader in 
network integration, in the development of Internet access services, and in expense 
reduction and process management. The merged company will be better positioned 
to compete with such telecommunications giants as AT&T (and its merger partner 
McCaw), MCI (and its partner British Telecom), Sprint (and its partners France 
Telecom and Deutsche Telekom), TCI, Time Warner, and many others. 

The merged company will also be better positioned to deliver greater benefits to 
customers, employees, and shareholders. Customers will benefit because the com- 
bination of the resources and strengths of both companies, including a sharing of 
start-up costs, will enable the merged company to offer a broader array of tele- 
communications products and services at competitive prices. Employees will benefit 
because the combined company will be a financially stronger and more effective 
competitor, resulting in the creation of new jobs and advancement opportunities in 
new lines of business. Shareholders will benefit because the combined company will 
have a more diversified, stronger financial base and be better positioned to succeed 
in growing the business and shareholder wealth. 

The merger will require Department of Justice ("DOJ"), Federal Communications 
Commission ("FCC"), California Public Utilities Commission ("CPUC") and Nevada 
Public Service Commission ("Nevada PSC") review. The DOJ will review the merger 
under Section 7 of the Clayton Act. The FCC will have to review and approve the 
transfer of microwave, personal communications service ("PCS") and other licenses 
from PacTel to SBC. And finally, the CPUC and the Nevada PSC will review and 
approve the transfer of control in accordance with applicable state law. 

B. The Hart-Scott-Rodino merger review process 

On April 10, 1996, SBC and PacTel filed their pre-merger notification documents 
with the DOJ pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 
1976 ("HSR"). Under the HSR procedures, the DOJ issued its "second request" for 
documents and information concerning the merger. SBC and PacTel have both com- 
pleted their production of these materials, and the DOJ has advised the parties that 
they are in substantial compliance. This means that we are free to close the trans- 
action as soon as other regulatory approvals are received. In the meantime, we are 
providing answers to the DOJ's few remaining questions. We hope that the DOJ will 
conclude its investigation in the very near future. 

C. This merger presents no antitrust concerns 

Under the applicable case law interpreting and applying Section 7 of the Clayton 
Act, the critical question is whether the proposed merger will result in a "reasonable 
likelihood" of a substantial lessening of competition. 

SBC and PacTel are not actual competitors today. SBC and PacTel operate in en- 
tirely distinct and separate geographic areas of the country, and they do not com- 
pete in any relevant product market. Accordingly, this merger will have no adverse 
impact upon competition by eliminating an actual competitor. 

Moreover, SBC and PacTel are not potential competitors. Each company plans to 
compete in the telecommunications marketplace by building upon their strengths in 
areas where they have network facilities in place, an existing customer base, and 
brand name recognition. This is true whether one is talking about local exchange 
and exchange access, long distance, wireless, video, or Internet access services. This 
means that absent the merger, SBC intended to compete only in its traditional five 
state region of Arkansas, Kansas, Missouri, Oklahoma, and Texas, and out-of-region 
where it provides cellular and cable television services. In the case of PacTel, it 
means California and Nevada. Consequently, under DOJ's Merger Guidelines, SBC 
and PacTel are not potential competitors now or in the near future. 



18 

In addition, there are many actual and potential competitors of both SBC and 
PacTel in their respective geographic and product markets, which only underscores 
that competition will not be diminished by this merger.^ 

II. THE STATE OF COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY 

This portion of my testimony will briefly discuss SBC's view of the current state 
of competition in the telecommunications marketplace, with special emphasis on the 
long distance and local exchange marketplaces; of the Telecommunications Act of 
1996 ("'96 Act"); and of the FCC's recent orders to implement the '96 Act. 

A Competition before the Telecommunications Act of 1996 

Over the past twelve years, the United States has experienced some competition 
in both the long distance and the local exchange marketplaces. Historically, the big- 
gest impediments to the development of competition have been both legal and regu- 
latory barriers to entry. These legal and regulatory entry barriers at both the fed- 
eral and state levels have imposed artificial restrictions on firms seeking to offer 
a package of both long distance, local exchange services, and other telecommuni- 
cations services.3 This has occurred despite the fact our market research tells us 
that customers are demanding one-stop shopping for all their telecommunications 
needs and one bill for the services they receive. 

1. The long distance marketplace 

In the case of the long distance marketplace, the legal barrier to entry by the re- 
gional Bell companies has insulated the interexchange carriers from significant com- 
petition and enabled them to keep their prices to the average consumer artificially 
high. Since 1984, the marketplace for interLATA long distance services has been 
dominated by three facilities-based carriers (AT&T, MCI, and Sprint), with some 
other smaller facilities-based carriers and hundreds of resellers providing the bal- 
ance of the "competition." At the end of 1995, AT&T, MCI, and Sprint had a com- 
bined total market share of 81.8%.'' 

Market shares, however, do not tell the whole story. The interexchange market- 
place is not characterized by the price competition that most consumers anticipated 
in 1984. Rather than engage in price competition, AT&T, Sprint, and MCI have en- 
gaged in what can best be described as "lock-step" pricing. The only competition 
which the average consumer sees from these interexchange carriers is in the form 
of advertising. 

Since 1990, access charges — the charges which local exchange carriers assess 
interexchange carriers for originating and terminating long distance calls — have 
steadily gone down. At the same time, except for certain privileged customers who 
are able to take advantage of specific discount pricing packages, the basic rates 
AT&T, MCI, and Sprint have charged the remaining consumers for placing long dis- 
tance calls have steadily gone up in "lock-step."^ James M. Buchanan, winner of the 
1986 Nobel Prize in Economics, has concluded that "[plricing in the interLATA mar- 
ket now more closely resembles an oligopoly than the perfect competition envisioned 
a decade ago." ^ And Paul W. MacAvoy, former dean of the Yale School of Manage- 



^As of today, 51 firms have been granted authority to become local exchange carriers in SBC's 
region, and 65 such applications are pending. Similarly, as of June 1, 1996, 64 firms were grant- 
ed authority to become local exchange carriers against PacTel in California, and 13 such applica- 
tions were pending. These include interexchange carriers (such as AT&T and MCI), CAPs (such 
as MFS and TCG), adjacent local exchange carriers (such as GTE), cable television providers 
(such as Time Warner), and others. 

^For example, the regional Bell ojDerating companies were prohibited fi-om providing 
interLATA long distance services in competition with the interexchange carriers by tne Modi- 
fication of Final Judgment. The '96 Act continues to temporarily prohibit the regional Bell com- 
panies from providing in-region interLATA long distance services. Interexchange carriers and 
others were largely prohibited by state law from providing local exchange services in competition 
with the incumbent franchised local exchange telephone companies. 

"•Table 6, Long Distance Market Shares: Fourth Quarter 1995, Industry Analysis Division, 
Common Carrier Bureau, FCC, March 1996. 

^Attachment 2 is a chart refiecting these access charge reductions and lock-step price in- 
creases as of January 1, 1994. This chart was attached to the Affidavit of Lester D. Taylor, Pro- 
fessor of Economics, University of Arizona, in support of the Motion Of Bell Atlantic Corpora- 
tion, BellSouth Corporation, NYNEX Corporation, and Southwestern Bell Corporation To Vacate 
The Decree, U.S. v. Western Electric Co., Civil Action No. 82-0192 (D.D.C. July 6, 1994) ("A/o- 
tion To Vacate). 

Since that time, AT&T, MCI, and Sprint have raised prices in lock-step on at least two more 
occasions. The lastest was early in 1996. AT&T proposed rate increases for basic residential long 
distance service and some business services on February 16, followed by Sprint on February 20, 
and MCI on February 21. These rate increases went into effect on one day's notice. 

® Affidavit of James M. Buchanan at 6, in support of the Motion To Vacate. 



19 

ment, has written a book based upon his research and economic analysis of pricing 
in the long distance market which also confirms the existence of this phenomena.^ 
We believe that increased competition from regional Bell company entry into the 
in-region interLATA long distance market will benefit consumers. 

2. The local exchange marketplace 

Historically, local exchange service in this country has been provided by telephone 
companies which held franchises granted by the states. Under the terms of these 
franchises, the local exchange telephone companies were generally the only firms le- 
gally authorized to provide service in their certificated service territories. This grant 
of an exclusive franchise was based upon a belief among many economists that the 
provision of local exchange service was a natural monopoly. 

In return for this exclusive franchise, the companies providing local exchange 
service were pervasively regulated by the state public service commissions in respect 
to the services which they offered the public, the prices they charged for those serv- 
ices, the capital investments they made, and the level of earnings they could receive 
on their investment. In addition, they had the obligation to serve all customers 
within their franchised service territories — that is, to provide universal service at 
artificially low rates regardless of actual costs. In order to support universal service, 
the pricing structure under which the franchised local exchange telephone compa- 
nies provided their services was based upon numerous subsidies. Exchange access, 
long distance, and vertical services (e.g., speed dialing, call waiting, three-way call- 
ing, Caller ID, etc.) subsidize local services, business services subsidize residence 
services, and urban services subsidize rural services. 

Despite these entry barriers, local exchange carriers like SBC have seen the de- 
velopment of some competition in the form of private networks, CAPs, interexchange 
carriers, and wireless. 

Large customers such as businesses, office parks, hospitals, universities, and gov- 
ernment entities have created private networks which completely bypass the fran- 
chised local exchange telephone company. Such private networks are used to switch 
calls within the network itself, and to deliver calls directly to the local exchange car- 
riers, CAPs, and interexchange carriers. 

CAPs — such as Metropolitan Fiber Systems, Inc. ("MFS") and Teleport Commu- 
nications Group ("TCG")— have also emerged as a source of competition in the provi- 
sion of exchange access services to interexchange carriers and other large customers. 
In the past five years, we have seen a proliferation of the CAPs which have deployed 
fiber optic rings in all major cities throughout the United States. Large customers 
can deliver traffic from their private networks directly to the CAPs for delivery to 
interexchange carriers and completely bypass all local exchange carrier facilities. 
Moreover, CAPs can and do purchase interexchange services from the interexchange 
carriers and resell those services in conjunction with their access services. Con- 
versely, interexchange carriers can and do purchase access services from the CAPs 
and resell them in conjunction with their interexchange services. CAPs are preva- 
lent in all of SBC's major markets and provide direct competition to Southwestern 
Bell Telephone Company ("SWBT").^ 

IntraLATA toll competition exists in each of SBC's five states. Since the prices 
SWBT charges consumers for intraLATA toll services include subsidies for basic res- 
idential services, interexchange competitors (such as AT&T, MCI, and Sprint) have 
made major inroads into this market. 

Finally, wireless has also become a source of competition in the local exchange 
market. The cellular industry has seen phenomenal growth since its inception in 
1984, when the FCC licensed two facilities-based cellular carriers in each market. 
It has provided some consumers with an alternative to placing calls over the 
landline local exchange network. Recently, the FCC has auctioned the licenses for 
the new wireless service knovra as PCS.^ Thus, PCS will soon provide the local ex- 
change industry with many new facilities-based competitors. 



■^ Paul W. MacAvoy, "The Failure of Antitrust and Regulation to Establish Competition in 
Long-Distance Telephone Service," The MIT Press and The AEI Press ( 1996). 

^Attachment 3 shows the number of CAPs and the location of CAP networks in each of the 
five states served by SBC. 

9 There will be two 30 MHZ licenses in each of the 51 MTAs, and one 30 MHZ license and 
three 10 MHZ licenses in each of the 493 BTAs. Rand McNally partitions the 50 states and the 
District of Columbia into Major Trading Areas (MTAs) and Basic Trading Areas (BTAs). MTAs 
serve as regional units "of wholesaling, distribution, banking, and specialized services such as 
advertising" and can sprawl across several states. BTAs are smaller and represent communities 
of interest where consumers obtain "specialized services, such as medical care, entertainment. 

Continued 



20 

Most recently, AT&T, MCI. Sprint, the CAPS, wireless carriers, and cable tele- 
vision service providers have all announced plans to step up their efTorts to compete 
w-ith SBC in ofTering similar packages of products and services. For example, in the 
June 12, 1996 issue of The Wall Street Journal, it was reported that Robert E. 
Allen, Chairman and Chief Executive Officer of AT&T, told some investment ana- 
lysts that AT&T — the largest telecommunications company in the country, with a 
nationwide network, the most customers, and a brand name that is almost synony- 
mous with telephony — "plans to take at least a third" of the $90 billion local tele- 
phone market within the next five years. Similarly, MCI and Sprint — the nation's 
second and third largest interchange carriers — have announced plans to enter the 
local exchange market nationwide by investing millions of dollars in local exchange 
facilities. CAPs (such as MPS and TCG) and cable television service providers (such 
as TCI and Time Warner) also have announced plans to compete in the provision 
of local exchange services. AT&T, MCI, MPS, TCG, and Time Warner have all re- 
ceived authority to provide local exchange services in competition with SBC in its 
geographic service territory. 

B. The Telecommunications Act of 1996 

The '96 Act became effective on Pebruary 8, 1996. This was the most extensive 
re-write of our nation's telecommunications laws in the past 60 years. The promise 
of the '96 Act was a removal of all legal and regulatory entry barriers, and a process 
whereby over time, all telecommunications service providers would have the free- 
dom to provide whatever packages of services are demanded by their customers. Ac- 
cording to the Conference Report accompanying the '96 Act, Congress intended "to 
provide for a pro-competitive, de-regulatory national policy framework designed to 
accelerate rapidly private sector deployment of advanced telecommunications and 
information technologies and services to all Americans by opening all telecommuni- 
cations markets to competition." 

One of the most significant objectives of the '96 Act was to open the local ex- 
change telecommunications industry to competition. Congress established a new 
framework for the development of local exchange competition. Pirst, it removed 
state and local barriers to entry by competitors of the incumbent local exchange car- 
riers, which had the effect of eliminating the exclusive local exchange franchise 
granted by the states. Second, Congress imposed a set of general access and inter- 
connection obligations on all local exchange carriers and some additional obligations 
on the incumbent local exchange carriers, all of which are designed to facilitate the 
entry of local exchange competitors pursuant to a strict timetable. Congress specifi- 
cally left the particular terms and conditions of interconnection to "good faith" pri- 
vate party negotiations between the incumbents and competitors. Third, in recogni- 
tion of the fact that regulation of local exchange telephony has historically been an 
intrastate matter under the control of state public service commissions. Congress 
gave the states a significant role in the development of local exchange competition. 
If and when the parties reached an impasse, Congress specifically provided that the 
state commissions would arbitrate those unresolved issues. Congress further re- 
quired that access and interconnection agreements, whether they are arrived at 
through negotiation or arbitration, be approved by the state commissions. Pinally, 
Congress specifically established the pricing standards state commissions would 
apply in arbitrations to ensure just and reasonable rates for interconnection, 
unbundled network elements, reciprocal compensation, and resold services. In this 
regard. Congress made it clear that incumbent local exchange carriers, which are 
required to make their networks and services available for use and resale by their 
competitors, would recover their actual costs of doing so which may include a rea- 
sonable profit. 

The '96 Act also contains a mechanism whereby the regional Bell companies can 
receive authorization to provide in-region interLATA services. When a regional Bell 
company enters into one or more state approved access and interconnection agree- 
ments with one or more competing providers of telephone exchange service to resi- 
dence and business customers either exclusively or predominantly over their own fa- 
cilities, or when it generally offer access and interconnection pursuant to a state ap- 
proved statement of general terms and conditions if no such provider has requested 
such access and interconnection, the regional Bell company may apply to the FCC 
for interLATA relief 



higher education and a daily newspaper." As such, BTAs can include one or more counties. Rand 
McNally, 1992 Commercial Atlas & Marketing Guide 36-39 (123d ed. 1992). 



21 

1. SBC's experience under the '96 Act 

Immediately upon enactment of the '96 Act, SBC began to fulfill its obligations 
to open the local exchange to competition. 

As a first step, SBC assembled a core group of fifty full-time negotiators, account 
managers, and attorneys to receive requests for negotiations and to begin the nego- 
tiation process. This core group reports to a Vice President of SWBT, who has the 
full backing of SBC and access to the necessary resources to successfully compete 
negotiations and to consummate access and interconnection agreements with local 
exchange competitors. SWBT is also actively developing a statement of general 
terms and conditions under which it will offer access and interconnection. 

As of the end of August, SBC had received 55 requests for negotiation, has signed 
17 interconnection agreements, has entered into 5 arbitrations of some issues with 
some competitors in four of its states, and had 2 state commission approved agree- 
ments. SBC currently has signed interconnection agreements with American Com- 
munications Services, Inc. ("ACSI"), American Telco Inc., Brooks Fiber Communica- 
tions, Dial US, Kingsgate, MFS, Texas Communications South, TCG, Time Warner, 
and US Telco. SBC currently is in arbitration with AT&T, MCI, MFS, TCG, and 
ACSI. 

It is my understanding that other local exchange carriers are experiencing similar 
success in negotiating and consummating access and interconnection agreements 
under the '96 Act. This is evidence that private party negotiations and state super- 
vised arbitration can work to introduce competition in the local exchange market- 
place. Moreover, SBC and the other regional Bell companies have every incentive 
to enter into such agreements. As indicated above, consummation of state approved 
access and interconnection agreements with facilities-based local exchange competi- 
tors is one way in which the regional Bell companies can obtain interLATA relief 

2. The FCC's Reports & Orders 

Just as the negotiation and arbitration process established by Congress is bearing 
fruit, the FCC intervened to change the rules of the game in a significant and coun- 
terproductive way. In doing so, the FCC has gone far beyond the limited role Con- 
gress prescribed for it. The two sections of the '96 Act which define the new para- 
digm for the development of local exchange competition contain only 9 pages of leg- 
islative language. Yet, on August 8, 1996, the FCC released two Reports & Orders 
which when combined contain over 800 pages of text, with over 4000 footnotes. With 
these Reports & Orders, the FCC has replaced Congress' "national policy frame- 
work" of private party negotiations and state supervised arbitration with a perva- 
sive federal regulatory scheme of "national standards and rules" which define every 
significant term and condition of access and interconnection. The FCC's Reports & 
Orders leaves virtually nothing for negotiation or arbitration. The FCC has pre- 
empted the role preserved for the states by Congress, and has, in essence, "national- 
ized" control of the local exchange industry. Thus, the FCC has transformed what 
Congress intended to be the rapid development of local exchange competition into 
a federal bureaucratic morass of rules and regulations. 

The FCC's rules are unsound not only on jurisdictional grounds, but also on eco- 
nomic and policy grounds. For example, the FCC has issued mandatory pricing rules 
for interconnection and access to unbundled network elements, which only allow the 
use of forward-looking incremental costs based upon the use of the most efficient 
technology. These pricing rules do not take into account the incumbent local ex- 
change carriers' existing network design, nor the technology that is currently in op- 
eration. Furthermore, these pricing rules ignore prudently made network invest- 
ments reflected in the incumbents' embedded costs. Contrary to the express lan- 
guage of the '96 Act, the FCC's pricing rules deprive the states of the ability to de- 
termine just and reasonable rates in accordance with the pricing standards in the 
'96 Act, and deprive the local exchange industry of receiving just compensation for 
the use of its property. 

One of the most significant goals of Congress in passing the '96 Act was "to accel- 
erate rapidly private sector deployment of advanced telecommunications and infor- 
mation technologies and services." The FCC's pricing rules will negatively affect the 
technological development of the local exchange networks. Under the FCC's rules 
neither the incumbent local exchange carriers nor their new competitors wall have 
any incentive to make the necessary investments to deploy such advanced tech- 
nology and services. In fact, just the contrary is likely to occur. The incumbents will 
have reduced incentive to make those investments, because they will not be fully 
compensated for doing so when their competitors make use of their facilities. New 
competitors wall have little incentive to do so, because under the FCC's rules they 
can obtain everything they need to provide a package of end-to-end services at a 
below cost price with no capital at risk. In either event, the rate of new investments 



22 

in technology in the local exchange will be stifled, and innovation in local exchange 
services will be retarded. 

Finally, the FCC's release of its Reports & Orders also immediately brought a 
great deal of uncertainty to the development of local exchange competition. The Na- 
tional Association of Regulatory and Utility Commissioners and several states have 
filed petitions for review of the FCC's preemption of state commission jurisdiction. 
Similarly, many local exchange carriers, like SBC, have also filed petitions for re- 
view. The appeals from the FCC's decisions will place the local exchange industry 
and the development of competition in a state of confusion. Until the appeals are 
decided, the parties will not know whether the current FCC's rules will ultimately 
apply. If the court of appeals determines that the FCC exceeded its jurisdiction, the 
case undoubtedly will be remanded back to the FCC with instructions. The FCC will 
then have to begin a new rulemaking, and the state commissions and the parties 
■will have to start the negotiation and arbitration process all over again. Surely, this 
is not what Congress intended in passing the '96 Act. 



ATTACHMENT 1 — BACKGROUND INFORMATION ABOUT SBC AND PACTEL 

SBC is one of the world's leading diversified telecommunications companies. It is 
headquartered in San Antonio, Texas and has 59,000 employees. SBC serves 14.2 
million access lines within its traditional five state region of Arkansas, Kansas, Mis- 
souri, Oklahoma and Texas, where it provides local exchange, exchange access and 
intraLATA toll telephone services, enhanced calling services, wireless services, mes- 
saging services, telecommunications equipment, and directory advertising and pub- 
lishing under the "Southwestern Bell" brand name. Out-of-region in the U.S., SBC 
provides wireless services in broad market areas serving portions of Illinois, Massa- 
chusetts, Maryland, New York and Virginia, including the metropolitan areas of 
Chicago, Washington/Baltimore, Boston, Buffalo, Rochester, Syracuse and Albany 
under the "Cellular One" brand name. SBC also provides traditional cable television 
services in Montgomery County, Maryland and Arlington County, Virginia. Inter- 
nationally, SBC has an equity ownership interest in local and long distance service 
companies in Mexico, Chile, and the United Kingdom; in wireless service companies 
in Mexico, France, Chile, South Africa, and South Korea; in cable television compa- 
nies in the United Kingdom, Mexico, France, Chile and Israel; and in directory pub- 
lishing in Israel and Australia. Over the past five years, SBC has lead the regional 
Bell companies in revenue growth and earnings. This year, SBC was identified by 
Fortune Magazine as "America's most admired telecommunications company." 

PacTel is also one of the regional Bell companies. Its headquarters are located in 
San Francisco, and it has 49,000 employees. PacTel serves 15.8 million access lines 
in approximately 75% of California, including the major metropolitan areas of Los 
Angeles, San Diego, and San Francisco, and 33% of Nevada including Reno. It pro- 
vides local exchange, exchange access and intraLATA toll telephone services, voice 
mail and other information services, Internet access services, network integration 
services, and directory advertising. PacTel also owns personal communications serv- 
ices ("PCS") licenses to provide wireless services throughout California and Nevada. 



23 



Trends in Long Distance Rates and Exchange Access Charges 



LongDiaance Riiu 



Accus Charges 




'I/SO 7/l/SO ,/,^, 7/1/91 1/1/92 Tim 1/1/93 7/1/93 1/1/94 



Source: WEFA Group. Economic Impacr of Eliminating Trte Une-of Business ResTnctions on the Bell Companies. 
July 1993: Robin Gareiss. Rate Hikes: MCt, Spnnt Follow AT&T's Lead. Communications Week. August 9. 1993, 
at 60: Dan Reingold. Memll Lynch Global Sacunttas Research, LD Ir^dusrry Benefrts trom AT&T Price Hike. Again. 
Jan. 25. 1994; Enc Paulak. AT&T. MCI Jack Up Rates Again. Network World, Jan. 24, 1994, at 37 With the 
exception of the two most recent rate increases, long distance rates are based on the average prrce per mmute tor 
basic service. For the two most recent rate increases, rates are estimated as the average of their stated range of 
rate increases, if a rar^e was announced. AT&T rates are estimated as the average of rts business rate increases 
and Its residemial rate increases - a conservative estimate, corisidenng that more revenue comes from business 
customers than h-om residential customers. 



Attachment 2 



24 



Comprfitive Access Providers In Southwestern Bell Telephone Company's Territory 



NOT£&: (s) vsckr aooctrucbaa. (b> 
STATUS: OpcnCMod k dafioed 



CAP Operation 


City 


State 


Mrkt 
Area 


Status 


Year 
Started 


Route 
MHes 


Bldgs 

Srvdfb) 


Switches 
Tniratled 


Aaencm OTnTmimimfimi 


UttleRock 


AR 


A 


OperatiaiaJ 1 1994 


7 


34 




3rooks Fiber ProDGties 


Lane Rod: 


AR 


A 


OpenZioBial 


1994 


19 


24 




Tme Wamer Conranmatiooa 
.'TWO of Fsvtaenllc 


LuJleHodc 


AB. 


A 


Planned 


1996 








ACS 


Aistia 


IX 


C4.WT 


Planafid 


1994 








MQ Metro 


Austin 


TX 


CfeWT 


Dcvdopin^ 


1995 


1 




MaroAccesi 


Austm 


TX 


OStWT 


Ooeranonal 


1995 


40(a) 


28 




MetropoliOD Fiber Svstoia (WFS) 


Austin 


TX 


C&WT 




1994 






TWCofAnaia 


Austm 


TX 


CiWT 


ODoOional 


1994 


120(a) 


10 




ACSI 


HPko 


TX 


CiWT 


Opeiitianal 


1994 






3rt)ofa Fiber Properties 


aPsso 


TX 


C&WT 


Planned 


1995 


20 




GST Tdemmmimicsaoos 


HPaso 


TX 


C&WT 


Planned 


1995 






Metro Aettss 


HPaso 


TX 


C&WT 


piatmed 


1995 


15 


12 




TWCofaPiso 


HP«so 


TX 


CStWT 


Deveioomt 


1995 1 






Telepon Cammnmemau Group 


Labboek 


TX 


CiWT 


Ptaaed 


1994 








MaMeOD 


DaUas 


TX 


DFW 


Ooerational 


1994 






Pm*r,r 


Me&D Access 


DnUtis 


TX 


ESTV 


Opetaumal 


1995 








MPS 


Dallas 


TX 


DFW 


Opgannnai 


1990 


141 


209 


Insalled 


TCG 


Dallas 


TX 


rrw 


Opeiatiaeal 1 1990 


303 


90 


Installed 


7WC of Dallas 


Dallaa 


TX 


rffw 


Planned 


1995 1 1 




ACS 


Fort Worth 


TX 


DFW 


OoeraticBal 


1994 


1 


33 




Metro Access 


Fort Worth 


TX 


DFW 


Opgnnnnal 


1994 


105 


57 




TCG 


Fort Worth 


TX 


DFW 




1994 




1 


Ma Metre 


Houston 


TX 


H 


DereioDiiif 


1994 








MFS 


Hoostoc 


TX 


H 


Operaaonal 


1989 


259 


165 






HoustoQ 


TX 


H 




1989 


400 


35 1 


TCG 


Houston 


TX 


H 


Ooentusial 


1990 


317 


115 


fn^n^Hi 


TWC of Houston 


Houston 


TX 


H 




1994 


265 






MFS 


Kansas City 


MOiKS 


KC 


Planned 


1992 








KsnssB City Fibetnet 


Kansas Cilv 


MOiKS 


KC 


Oceraccnsl 


1986 


250 


60 




SntiMifield Fiber Net 


Spcingfidd 


MO 


KC 


Plannal 


1992 








Kiaaci 


Various Cities 


KS 


KC 


Oixntiaoal 


1989 ^ 


1200 






Hypenoo Ti-WnniTmniinitim'i 


Widuta 


KS 


KC 


OpetatiaDal 


1993 


130(a) 






Brocto Fiber Proceities 


OldahomaCitT 


CK 







1994 


88(a) 


50 




Cox Fibonei (TCG AfShnc) 


CSdahoma City 


OK 





Oooltiaoal 


1991 


UO 






Dobson Fiber 


CSiahomaCitv 


OK 





OnczaQooal 


1992 








OUataaa City 


OK. 





Develonmg 


1994 




1 


MFS 


Oklahoma Cir,' 


OK 





Planned 


1995 








Broola Fiber ProDerties 


Tulsa 


OK 







1986 


105 


42 




MFS 


Tulsa 


OK 





Planned 


1995 








Duital Tdeoott 


St Loms 


MO 


SL 


Devdonnu! 


1994 










Sl Loins 


MO 


SL 


Devdoomg 1 1993 


481(a) 


348 




MQ Metro 


St. Louis 


MO 


SL 


Devdoom)! 1 1994 








MFS 


St Louis 


MO 


SL 


Ooeiaticoal 


1992 


80 


42 


hittallcd 


SP Telecom 


St Loms 


MO 


SL 




1994 






TCG 


St Loms 


MO 


SL 


Oooamxial 


1993 


9) 


41 




CSW ComnnmicaDaiis 


Haiiin^en, 
McADen 


TX 


ST 


Opsaconal 


1994 


200 






CSW ConnnujjicBtions 


Laredo 


TX 


ST 




1995 








TWC CFitacom) 


Laredo 


TX 


ST 


Planned 


1994 








ICG ADcess Semcej 


San Ant^io 


TX 


ST 


Planned 


1995 


306 






Me&^ Access 


SanAstomo 


TX 


ST 


n^irliiitinp 


1995 


45 


27 




TWC (Fibrcaii) 




TX 


ST 


Ooennonal 


1992 


248 


64 





Attachment 3 



25 



Competitive Access Providers In Sonthwestem Bell Telephone Company's Territory 



CAP Openrtioa 

^^mgiom ConaMonitaliopt Sennoa . fee (ACST) - Austin 



Sopixes: 



CeaxOxm Koanfa Rqxnt lOfOV9i, T«loo Oompttiliati Report 0MVV?4 



ACSI - Port Worth 



OnmortifTtt RjM«rfi lUport IOA>l/>5. Fjl Worth Stg Ttfcig»g OVH/X 



ACSI - Liolc Bixic 



Ownrrtttiit Bi ilfrti »<port 1(M)1j9j, 



BroiJoFibg- P i U M U t i g-HPMO 



atyFrapdntHBag WWH 



BtadanberfropMliB -Link Rack 



Crmrrtinlt F.I ■MHU Report ia/PL/93 



ftoela ra>€r P m» ili « > - n i rt »hrm» Qty 



RnirfiReport 10^1/95. T«kco.iBDnpioBi<»» R«(»rt» 07/[>*^ 



Btoobi FibK Fttpoftkm - Tula (Fonnoly FSO MttroLmicj 
CoK fibcniec Croo AffiUds) - OUalkim Coy 



Coaneakat Socsdi R/cpon lOAl;^. Prcn Seleaai Nnnwn 02A3X/93 
POC Fiber D<ployiD«Up<iU< 04/94 



CSWC onti i "^ ■*'o na.bc - Coipui Chnjti. Hariggoi. McAlle c Lntdo _ 

DicnlTdtpcn 



CccDictiag Itim«rch gJiJcB 10101^5 



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> Cost FbeiNo Crci <»*i^'l'St >iA><A) 



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AaaasZxynB'Umn 10/19/95 
C<iuaiJM««tiiitIadlgii|iC<<Tjwl<», OK 0«^Z</»« 

MnHidnmct Nam 07/17/93, CconcdkKRcwcrdiRapcrt 10/0195 
KaniOtySiMr 01/IW4 _ 



Wntto 



i 01/21^ 



02«g/95 



MaM«rc.-D«ll«i 



CeiBurtiotllUKmtKqiort l(K>WS.B™i«P 01<W>4 



MaMaio-Houaop 



Rnato 01/0494 



Ma).fa«ro-S<.Loua 
Mdio Acccn - Amtn 



Eeotos 0l«4/94 



ConeaboaScEXRhRepoK ia/DL95 
^artm^amicaoSMdiam 03/2a^02PW5 



Marci jiccec - D«Dj» 



O^iT i n til- Ill RgegcblUpcit 10/0y?i 



ttore Acoog-BPno 



Cnnnrtimt t«M«iA gfpal ia/0iy?5. DilUt 



iomal lom/94 



Utn Ajxmm - Fcrt Watt 



ronmtwnt Satifa Baioct 10/0195. Fort Worth Stir-T«>og»ip 0I/1.7/W 



Mego AooBP *8iii Antgao 
MarepeBigiRbcrSyaaia(MFS)-Aiiam 



Ce nii ii '( i r«« lte»e«chltq;crt lQOl/95, Dillg Biainao Joaml tl^tt»« 
AitttJBAmcnOMiStgMgm 12/0593 



C«tFrtini t g i, i «r rh Rgport lQ/PI/g5.Ta l"^B ii if"'ti iboc»Rflpo(o t^393 



MFS-Hcmacp 



/>nnf^'^R«egtfa Report 10AH95 



MFS-Okl«hop» 



/^ppbaaocfe^Oartifiott»o0^^blicC ^J^lV ^a i^l oe«ad^leoeo^ty 11/1894 



MFS-SLLooa 



MFSPRXcgwriig 3/7095. COBoeaiaitEacBtARtpoK l(Wl/»5 



Mnhmwdi* Hypmm Tn ^r tT rm i i ii i ii i f i 'rtv Widua 



TheWichinEJBte 10/l&»t. 03Ar7/>4 



Rsmcs Po« lOOOSZ Fas&ntr 0L94. Ya3.<»VaioB 1294 



AppBaaocferCoHficacofSgyiCMAndiority 12'a^5 



TcJepert Or— — "■i'-^KKg Gmop (TCP) • Dtlltt 



OnwrtinnRewiirfiRiPMt 10/0195. TCP FwItrfeMM tl/l»/>4.0«/3195 



TCC-FoB Worth 



rmiM MomJggNwB 03/cr7/»<,FoBWorftStir-Tel<<pm 03/0*94 



Oomaaicutllewiidi Report 10/0195, TCGPimKdcaH 11/0994, 
Hoortfln Burinat Jounal Q9A)I195 



TCG-Lubbock 



TCOrimntaoDSlid* 03/2394 



TOO-gl-Loo ii 
Wmer 



RipeB 03/3095. ^ 



RoBarcfaKaport 10/0195 



CoaDccfacotltaawtKi^wrt lQA>l/»5. CiHe WoAl 08»94 



TWC-F«ytgCTmc 



Cnmfnina Baattcfa R«port - 10>P195 



TWC(FibtaaB)-Ltnii> 



S«aAanoi»Ew»«»N«<« 01^895 



TIVC-EPmo 



B Pue Traa 03/1 195. Fmltaitf 0395 



TWC(Fibn)mi)-S«nAinciiio 



StafiOBmo'Bjqrta'Hcm 01/2895. ConneoiciJt Itaordi Sepert 10/01/95 



TWCafHsus&xi 



Piih 04^)694. Ha«cc 



JOBTMI 01/U9« 



26 

The Chairman. Mr. Ebbers. 

STATEMENT OF BERNARD J. EBBERS 

Mr. Ebbers. Good afternoon, Mr. Chairman and distinguished 
members of the committee. My name is Bernie Ebbers. I am the 
president and CEO of LDDS WorldCom, one of the four largest 
long distance telecommunications companies in the United States, 
headquartered in Jackson, MS. WorldCom offers domestic and 
international voice, data and video products, and services to busi- 
ness customers and other carriers, including the residential mar- 
ket. The company operates a nationwide digital fiber optic network 
and has worldwide network capacity. WorldCom was founded in 
1983 as a long distance reseller and I have served as its president 
since 1985. 

I can't resist asking the famous political question from the 1992 
Presidential debates. Why am I here? I find it a little bit peculiar 
to be in the midst of companies who sent their pit bulldogs as at- 
torneys to represent them instead of other CEO's, but my under- 
standing is that the members of this committee have some interest 
in a merger we announced last month. 

WorldCom and MFS Communications Co., Inc., have executed a 
definitive agreement and plan a merger. MFS is a leading provider 
of communications services for businesses and government. It has 
led the way in toppling legal barriers to competition in the local 
telephone markets and is constructing and operating new fiber 
optic networks in 45 cities nationwide and internationally, financed 
with our own money, not with ratepayers' money. 

Our combination with MFS will indeed create a uniquely inte- 
grated telecommunications firm providing a single source for a full 
range of local, long distance, Internet, and international service 
over an advanced fiber optic network. The novelty of our deal stems 
from the fact that neither the local network portion of the consoli- 
dated entity nor the long distance portion is an incumbent monop- 
oly or a former monopoly. Like WorldCom, MFS is a young entre- 
preneurial upstart with no captive customers plunging headlong 
into competition with much bigger and more established players in 
the industry. 

What every company in this industry wants to accomplish is to 
be able to provide end-to-end service over a single company's own 
facilities. I believe the combined company will be a leader in assist- 
ing businesses to harness the full power of the Internet-based tech- 
nologies. I am particularly excited about our combined ability to 
meet the explosive demand for corporate intranets utilizing tech- 
nologies and facilities available from a single source. The combined 
company can also advance U.S. competitiveness overseas by comb- 
ing MFS's and WorldCom's international positions, particularly in 
Europe. 

Thank you very much. 

The Chairman. Well, thank you. 

[The prepared statement of Mr. Ebbers follows:] 

Preparfd Statement of Bernard J. Ebbers 

Good morning Mr. Chairman and distinguished members of the Committee. My 
name is Bernard J. Ebbers. I am the President and CEO of LDDS WorldCom, one 



27 

of the four largest long distance telecommunications companies in the United 
States. Headquartered in Jackson, Mississippi, WorldCom offers domestic and inter- 
national voice, data, and video products and services to business customers, other 
carriers and the residential market. The company operates a nationwide digital 
fiber optic network and has worldwide network capacity. WorldCom was founded in 
1983 as LDDS Communications, a long distance reseller, and I have served as its 
President since 1985. 

That is the same year the Bell Companies began their massive 10 year lobbying 
campaign to get Congress to reverse the brand new antitrust consent decree that 
separated them from AT&T, kept them out of the long distance business, and or- 
dered them to provide equal access in order to promote competition and lower prices 
for long distance services. It's fairly obvious that the 1984 antitrust decree is a com- 
petition success story. Both business customers and American consumers every- 
where have enjoyed long distance calling and faxing at pennies per minute, afford- 
able international calling, economical inbound 800 services, easy Internet access and 
more. People typically choose from more than half a dozen carriers vying for their 
long distance business. Cash incentives are not uncommon even for households 
within modest usage. 

By the mid 1990's, Congress was ready to answer the Bells' call for legislation. 
A consensus developed that Americans deserve the same benefits of innovation and 
competition in local telephone service as they have enjoyed in long distance service. 
So after countless false starts. Congress last February passed the very pro-competi- 
tive Telecommunications Act of 1996. As you know, the new law is both a long over- 
due update of the antiquated 1934 Act, which based all telecommunications on a 
regulated monopoly utility model, and a rational plan for dismantling the 1984 con- 
sent decree. The '96 Act directs the FCC and the states to eliminate monopoly condi- 
tions in local telecom services and promote competition. 

The Bell Companies will be permitted to sell long distance services within their 
regions once certain competitive conditions have been met in local markets on a 
state by state basis. The Bells will then be free to offer their customers one-stop 
shopping and full service packages. 

Last year, some in Congress actually expressed hope that the Bell Companies 
would compete against one another in the local telephone business. After aU, they 
do so in the cellular service business and in publication of directories. But so far, 
for technical reasons of spectrum allocation, the cellular business is a cozy duopoly 
in each market. And directories are not reliant on monopoly local networks. Real 
competition in regular local telephone service is much more elusive. No Bell Com- 
pany is competing for the captive local customers of any other Bell. Ironically, de- 
spite their recognized expertise in the provision of local telephone service, not one 
of the Bells' applications to offer service in an out of region state requests certifi- 
cation as a local carrier. And by planning their mega-mergers, four of the Bell Com- 
panies have made their non-compete policies official. 

Soon after the Act was passed, a close-cousin of the Bells, GTE, broke onto the 
scene in the long distance industry. Using both its local exchange networks scat- 
tered around the country and long distance network capacity purchased at competi- 
tive rates from WorldCom, GTE signed up a quarter of a million long distance cus- 
tomers in its first few months of long distance operations. GTE is offering one-stop 
shopping for local and long distance to its business and residential customers. And 
GTE is not alone. Southern New England Telephone (SNET) has been doing like- 
wise in Connecticut. The problem is, almost no one in America yet has a choice for 
local telephone service or a choice of full service vendors. 

I can't resist asking that famous political question from the 1992 Vice Presidential 
debates, "Why am I here?" My understanding is that members of this Committee 
have some interest in a merger we announced last month. WorldCom and MFS 
Communications Company, Inc. (MFS) have executed a definitive agreement and 
plan of merger. MFS is a leading provider of communications services for business 
and government. It has led the way in toppling legal barriers to competition in local 
telephone markets, and is constructing and operating new fiber optic networks in 
45 cities nationwide and internationally. Our combination with MFS will indeed cre- 
ate a uniquely integrated telecommunications firm providing a single source for a 
full range of local, long distance, Internet and international service over an ad- 
vanced fiber optic network. The novelty of our deal stems from the fact that neither 
the local network portion of the consolidated entity nor the long distance portion is 
an incumbent monopoly or a former monopoly. Like WorldCom, MFS is a young, en- 
trepreneurial upstart with no captive customers, plunging headlong into competition 
with much bigger, more established players in the industry. 

In fact, as the new Telecom Act and the FCC have recognized, all new entrants 
in local telecom markets, including ourselves, will continue to rely substantially on 



28 

the incumbent local exchange carriers for interconnection with their single ubiq- 
uitous switched network. That is why the FCC agonized for months and its staff 
worked round the clock earlier this summer to craft the interconnection rules that 
will make competition possible. The billions of dollars of investment already spent 
and planned to be spent by MFS and many others in local fiber rings, local switches 
and more cannot begin to fully duplicate existing Bell networks that reach into 
every home and office in their regions. In other words, we and other new entrants 
will continue to rely on Bell interconnection even where we have our own facilities, 
and that dependence will be far greater in markets where we still lack our own fa- 
cilities. 

So I am truly flattered at the attention bestowed on us by the Judiciary Commit- 
tee. With a whopping 5% market share in long distance, I expect our teaming up 
with a company having even less than 19c market share in local service amounts 
to a big yawn in terms of antitrust issues. I guess it is the boost in the potential 
for real local competition that has attracted most of the media attention. And inci- 
dentally, World Corn's success should certainly dispel those tired old Bell claims of 
some cozy oligopoly or cartel controlhng the long distance business. 

To fill in some of the details: the combined company will be known as MFS 
WorldCom. We hope to complete the merger within four to eight months. Since 
WorldCom's networks will connect to MFS' city networks, we expect to achieve sig- 
nificant cost savings from reduced line and access costs. The merger will also elimi- 
nate duplication of capital spending programs, including those for undersea capac- 
ity, international facilities and MFS' planned U.S. intercity network. MFS recently 
merged with UUNET, a leading provider of a comprehensive range of Internet ac- 
cess options, applications, security products and consulting services. The combined 
MFS WorldCom will be uniquely positioned to deliver competitive services that will 
help meet the ambitious goals of the new Telecom Act. 

What every company in this industry wants to accomplish is to be able to provide 
end to end service * * * over a single company's own facilities. I believe the com- 
bined company will be a leader in assisting businesses to harness the full power of 
Internet-based technologies. I am particularly excited about our combined ability to 
meet the explosive demand for corporate "Intranets" utilizing technology and facili- 
ties available from a single source. The combined company can also advance U.S. 
competitiveness overseas by combining MFS' and WorldCom's international posi- 
tions, particularly in Europe. 

1 was asked to describe some of the effects our combination with MFS will have 
on competition and whether there will be anticompetitive effects. I have already 
suggested some of the positive effects on competition, but you may be more inter- 
ested in what outside observers have said. First, in terms of local telephone service, 
the Wall Street Journal on August 27th reported that "In the past four years, MFS 
has done for local service competition what MCI originally did to break AT&T mo- 
nopoly in long distance * * * various proposals, such as allowing local customers 
to switch carriers and keep their original phone numbers were pioneered by MFS." 
The Jackson Clarion Ledger reported on the same day that the merger "positions 
WorldCom to take on the Baby Bells." In other words, it positions us to avoid being 
crushed by them. According to USA Today, "the merger would help MFS and 
WorldCom fight the big boys." 

Secondly, in terms of effects on competition in long distance, the Clarion Ledger 
quoted industry analysts as saying "the merger produces a true fourth competitor 
to the biggest long distance providers AT&T, MCI and Sprint." According to the 
Wall Street Journal, "combining with MFS effectively pushes WorldCom into new 
markets where it needs to operate if it is going to keep up with the other long dis- 
tance giants." USA Today reported that "the deal could make the combined com- 
pany, MFS WorldCom, a major player in telecom, just a rung below the regional 
Bells, GTE, MCI, AT&T and Sprint." USA Today also predicted MFS WorldCom 
"could be a next generation MCI" and that we "may help push down local and long 
distance rates." 

In terms of anticompetitive concerns, I respectfiilly suggest they are non-existent 
in the case of MFS WorldCom. USA Today quoted analysts saying that "the compa- 
nies are merging because they have to." "Big telecom finds are getting bigger and 
moving toward one-stop shopping. Witness Bell Atlantic and NYNEX announcing 
they will merge as will SBC and Pacific Telesis. It's a defensive move for both 
[WorldCom and MFSJ." 

Unfortunately the Bells still have a monopoly on anticompetitive effects in tele- 
communications. Their state and local political clout is matched only by their com- 
plete market dominance and both are simply unparalleled in modem industry. Com- 
binations of these monopolies violate the pro-competitive spirit of the new Telecom 
Act. They extinguish some of the best potential for local competition. My personal 



29 

view, although I am no antitrust expert, is that competition needs a chance to de- 
velop before the monopolies just get bigger. 

Hopefully our new bundled services will become uniquely attractive to our cus- 
tomers. But unlike the Bell Companies, we will never be able to sell a bundled pack- 
age on the basis of the fact that the customer has no other choice of vendor for any 
one piece of that package. 

The Chairman. We will allow for 7 minutes of questioning per 
person here. Let me just ask a few questions and all three of you 
can answer, if you would care to. If you don't care to, just say so. 

As I understand it, the Telecommunications Act was designed to 
promote competition among providers and increase consumer 
choice primarily by breaking down regulatory barriers and permit- 
ting everyone in the telecommunications industry to get into com- 
petition with one another with everyone else's business. 

I guess this question is directed to Mr. Young and Mr. Ellis. How 
would your merger be consistent with these goals? Mr. Young. 

Mr. Young. First of all, as I indicated in my written testimony 
and my oral remarks, we think this combination is going to better 
position us to compete with the likes of MCI-British Telecom, with 
AT&T, and with Sprint and its other European backers. This is a 
market where size matters, where size and scope are critical to de- 
velop customer brand identification, in developing the kinds of effi- 
ciencies that Mr. Ellis was talking about; scale and scope in pro- 
curement; scale and scope in research and development, which is 
a critical factor going forward. The greater size of the company is 
going to better enable us to be a ftill-service provider competing 
head to head with the likes of AT&T, MCI, and Sprint. 

The Chairman. Mr. Ellis. 

Mr. Ellis. Well, Senator, I would say that I think that the prom- 
ise of the legislation was to introduce competition with or without 
our kind of merger. In the Southwestern Bell territories of 5 States, 
we have, as I speak, 115 — latest count, I believe — applications for 
competitors to come in and provide local exchange telephone serv- 
ice. That speaks for itself. Pacific Telesis has something approach- 
ing another 100 competitors who are coming in under the Tele- 
communications Act to go into the market and compete for local ex- 
change telephone service. 

Our merger, I think, will make us a stronger competitor, both in 
terms of the local exchange business, but also, more importantly, 
it will make us a better competitor in the long distance business. 
We will start with zero market share in long distance and we will 
go into it and be vigorous competitors, and we will be more vigor- 
ous and better competitors with the combined company than we 
would have been otherwise. 

The Chairman. Well, some of our panelists today may very well 
suggest that you ought to satisfy certain conditions, such as inter- 
connection performance standards or compliance with section 271 
of the Telecommunications Act, before your merger is approved by 
regulators. Interconnection performance standards, as I understand 
it, are already provided for in the Telecommunications Act and sec- 
tion 271 governs the Bells' entrance into the long distance market. 

Frankly, I do not believe it is proper to include either of those 
conditions as part of the antitrust legal analysis that should be ap- 
plied by regulators to your mergers. What is your view? I take it 
you agree with me on that. 



30 

Mr. Young. I am hard-pressed to disagree, Mr. Chairman. 
[Laughter.] 

The Chairman. Hard-pressed to disagree. I like witnesses who 
agree with me. In fact, I even Uke witnesses who don't, but that 
is one thing that I am concerned about. 

Mr. Ebbers, what is your feehng about that? 

Mr. Ebbers. Well, Mr. Chairman, if we had any reason to feel 
comfortable with the fact that they would comply with the checklist 
if the merger went through, it wouldn't be an issue. But we cer- 
tainly don't feel confident that that will occur and I, for one, believe 
that should be a precondition. 

The Chairman. Mr. Ebbers, I congratulate you on what certainly 
appears to be a very impressive record of growth with your com- 
pany and, as you put it, "plunging headlong into competition with 
much bigger, more established players in the industry." I believe 
that such entrepreneurial success stories are vital to the American 
economy. 

What are your goals for local exchange market share in the next 
5 years? 

Mr. Ebbers. Market share? 

The Chairman. Yes. 

Mr. Ebbers. Mr. Chairman, it is so small that it is hard to put 
a percentage on it. We are currently building out local networks, 
our own local networks, in 45 markets and intend to expand that 
to 85 markets over the next 3 years. And if we are as successful 
as we think we will be, we would still be substantially less than 
10 percent of the market. 

The Chairman. Doesn't your merger with MFS and your pro- 
jected growth for the merged company in the local exchange mar- 
ket prove that there already is competition in the local exchange 
market and that it is likely to be much more competitive in the 
coming years? Doesn't it kind of show that? 

Mr. Ebbers. Mr. Chairman, certainly this merger, the ability to 
combine with the local exchange company, is the result of a very 
good telecommunications bill and an absolutely tremendous ruling 
by the FCC on the interconnection order. Those people are to be 
complimented greatly on what they have done. That was the driv- 
ing force behind this. 

But the fact of the matter is that even though we have agree- 
ments with six of the regional Bell operating companies — the one 
missing is U.S. West and that is almost impossible to get so we 
have kind of laid that aside — none of those agreements meet the 
checklist and they are substantially different from the checklist. 
But because we are investing in our own local facilities, we are 
going ahead and trying to compete on whatever basis we can. 

The Chairman. OK. Now, how much of an advantage do you 
think an incumbent local exchange provider would have in the long 
distance market due to customer loyalty and/or preference for so- 
called one-stop shopping? 

Mr. Ebbers. Well, they have a tremendous advantage, and the 
whole goal of our company is to position ourselves so that we can 
have access to an originating customer. One of my fellow panelists 
mentioned a little while ago that they do not have any long dis- 
tance revenue. Well, that is just not true. They have a substantial 



31 

amount of intraLATA revenue and, in addition to that, have mas- 
sive plans out to extend local calling areas so that they can rede- 
fine a long distance call from long distance to local. 

The Chairman. But don't you think it works both ways; that is, 
wouldn't an incumbent long distance provider have an advantage 
in the local market due to customer loyalty or for preference for 
one-stop shopping? 

Mr. Ebbers. Well, we don't know how loyal the customer is be- 
cause they have never had a choice. 

The Chairman. So you are not sure what the answer is to that? 

Mr. Ebbers. No. We are very confident that the customers will 
choose the best provider of services, and we intend to be one of 
those. 

The Chairman. Well, let me just go back to Mr. Young and Mr. 
Ellis. Just one last question. It has been suggested that the re- 
gional Bells have a unique capacity to compete with each other due 
to their experience in delivering local exchange service. Do you 
folks agree, and who do you see as your primary competitors in the 
near future, and who do you see as your primary competitors in the 
residential markets? 

Mr. Young. Mr. Chairman, I think when you look at who are the 
primary competitors in the local exchange, the list is pretty logical. 
It is people who already have facilities in place to compete. It is 
people who already have customer contacts in business in place. 
That is the long distance carriers, that is the cable companies, and 
it may well in the future be wireless providers. 

In particular, in addition to those elements, companies like 
AT&T have just enormous presence with the customer. If you 
stopped 10 people randomly in almost any city in the country and 
asked them who their local exchange carrier is, they would tell you 
AT&T. So they are the people who are really best positioned to 
compete in our market. 

As for Bell Company competing with Bell Company, maybe the 
best example I can give to you, there is just a couple months ago 
the FCC had a proceeding on competition in New York in connec- 
tion with a regulatory issue we don't have to go into in great detail 
here. The FCC went through all the people that they thought were 
going to compete in New York. We weren't on the list. 

The Chairman. Mr. Ellis. 

Mr. Ellis. Well, I would agree with what Mr. Young said. AT&T 
I accept at their word; that is, their intention is to obtain in the 
next 5 years approximately one-third of the local exchange busi- 
ness. But I want to come back to what I said before. We have peo- 
ple voting with their entry into the business today. We have 115 
companies who have filed applications to get in the local exchange 
business in our 5 States today and there are approximately 100 in 
California and they include all the big ones, the household names. 
So, I think there will be an abundance of local exchange competi- 
tion. 

The Chairman. Mr. Ebbers, do you have any comment about 
that? 

Mr. Ebbers. Well, the only significant part is that it doesn't take 
a lot of effort to file an application. The ability to do it on a profit- 
able basis is an altogether different matter. 



32 

The Chairman. We will go to Senator Leahy first, since he was 
here earlier. 
Senator Leahy. 

Senator Leahy. I will yield to Senator Feingold. 
The Chairman. Senator Leahy will yield to Senator Feingold. 

STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR 
FROM THE STATE OF WISCONSIN 

Senator FEINGOLD. Thank you, Mr. Chairman, and thank you, 
Senator Leahy. I thank our witnesses for being here today. I and 
other members of this committee requested this hearing after the 
second of two mergers of regional Bell operating companies 
[RBOC's] was announced this spring. 

The 1996 Telecommunications Act promised to open up to com- 
petition markets which were previously closed either by technology 
or regulatory barriers. Cable companies were to compete with the 
local exchange monopolies, and vice versa. Long distance compa- 
nies would be able to enter markets for local service, and the 
RBOC's were going to compete not only in long distance, but with 
each other, for local service. All of this promised competition was 
to provide lower prices, better service, and more choices to consum- 
ers. 

The mergers discussed by this first panel, however, raise serious 
questions about whether the 1996 act will actually make good on 
its promise. Media reports indicate that both long distance rates 
and cable rates have increased since the bill was enacted, and 
many companies have proposed to increase local telephone rates as 
a part of the implementation of the act. And now the most likely 
competitors to the RBOC's in local service according to some tele- 
communications analysts, and other RBOC's, are merging with one 
another. The rash of merger activity in broadcast and cable also 
suggests that concentration, not competition, has been the result of 
the Telecommunications Act, at least in the short run. 

The benefits to consumers that would have resulted from com- 
petition between these merging entities may be lost if they are ap- 
proved. The question is, Will any of the efficiencies gained from the 
merger be passed on to consumers, and if so, will those savings ex- 
ceed those possible under a more competitive market? 

Mr. Chairman, I ask unanimous consent that the rest of my 
statement be placed in the record. 

The Chairman. Without objection, we will put it in the record. 

[The prepared statement of Senator Feingold follows:] 

Prepared Statement of Senator Russell D. Feingold 

I want to thank Chairman Hatch for his wilhngness to hold this hearing today, 
in response to a request Senator Leahy, Senator Kohl and I made earlier this year 
to examine the very critical issue of competition in telecommunications markets. We 
asked for the hearing following the announcement of the proposed mergers between 
Bell Atlantic and NYNEX and between SBC and PacTel. 

These mergers raise the question as to whether the goal of the 1996 Tele- 
communications Act to encourage and promote competition within both established 
and emerging telecommunications markets is being achieved under the Act. 

Congress designed that Act to allow providers of different types of services to 
enter into other areas of business. It was expected that cable providers to compete 
with monopoly local exchange companies in providing local service. It was expected 
that the regional bells operating companies would begin competing with one another 
to provide local and long distance service, and to provide extensive video program- 



33 

ming and cable service. Congress also eased the rules under which the RBOCs could 
enter the lucrative long distance market in order to increase competition in that al- 
ready-competitive market. 

The proposed mergers we are focusing on today however, raise the question of 
whether or not consumers will actually see greater competition in telecommuni- 
cations and its associated benefits of lower prices, more choices and better services. 
It is unfortunate that some of the companies represented her today will be partners 
instead of competitors. 

I recognize that mergers are not inherently anti-competitive and in some situa- 
tions can provide tangible benefits for consumers. But I think this Committee has 
to examine some of these mergers by asking "How much competition in these mar- 
kets is precluded by the merger compared to the real or perceived benefits to con- 
sumers under the merger?" Will consumer prices fall as a consequence of the merg- 
er? Would they have fallen more in the absence of the merger? Is it possible that 
rates will rise as a result of the mergers? 

Those are important questions in the context of the 1996 Telecommunications Act. 
When we considered that bill earlier this year, I was extremely concerned that the 
legislation permitted far too much concentration in a nvimber of telecommunications 
markets and that shareholders, not consumers, would reap the benefits of this legis- 
lation. In light of both of the proposed mergers and the progress of the rulemaking, 
I am still concerned that the promise of the bill has been overstated. 

An August 11, 1996 Washington Post article suggested the benefits of the Act may 
have been overstated by its proponents. It states: 

Six months after enactment of the landmark Telecommunications Act of 
1996 — the law that is supposed to foster competition in cable and phone 
rates — the only thing that has changed for consumers is that their cable 
and long-distance bills are higher not lower. 

I was equally concerned earlier this year by the proposals submitted to the FCC 
to increase local phone rates by $2.50 to $11.00 per month, as part of the move to- 
wards competition. I wonder how popular this legislation would have been earlier 
this year if consumers were told to expect local rate increases as opposed to the rate 
decreases promised them. 

Merger activity hasn't been limited to the telephone industry. Since the enact- 
ment of the Telecommunications Act there have been a rash of proposed mergers 
between companies that were also likely competitors with one another. 

I am concerned about the implications of the proposed mergers: 

between U.S. West and Continental Cable — two companies that could compete 
to provide both cable and television; 

between Time Warner and Turner Broadcasting — a merger which increases 
concentration in the cable industry; and 

between Westinghouse/CBS and Infinity, creating a broadcasting powerhouse. 

FCC Chairman Reed Hundt said in June, the Commission's Mass Media Bureau 
had already processed 2,100 assignment and transfer applications for radio and tele- 
vision, a 42% increase over the previous year. That is in response to lifting of broad- 
cast ownership restrictions. Again, more concentration — not more competition. 

This extensive merger activity raises the questions of who controls and dissemi- 
nates information in this country, and how many different voices we want relaying 
that information. 

This Committee has a responsibility to carefully examine the implications of these 
mergers, not just from the pure anti-trust angle of whether the mergers should be 
approved. It is clear that we must urge the Department of Justice and other regu- 
latory bodies to carefully review these mergers and to impose conditions where nec- 
essary. However, we must monitor whether the legislation enacted earlier this year 
is achieving its fundamental goal of increasing competition in telecommunications, 
rather exacerbating concentration. 

Senator Feingold. Let me use part of my remaining time to ask 
Mr. Young and Mr. Ellis a question. You both apparently indicated 
prior to my arriving that you didn't consider your partners as po- 
tential competitors. I guess I am wondering about that because so 
many RBOCs indicated an interest in competing in each other's 
market for many types of communications services just a few 
months ago when we were debating the telecommunications bill. 

Could you tell me why the markets of your partners aren't at- 
tractive to you for any line of telecommunications service, as I un- 



34 

derstand a lot of long distance originates in those regions? And as 
a followup, are you considering entering the markets of any other 
RBOC's? Let's start with Mr. Young. 

Mr. Young. Yes, thank you, Senator. One thing I think I do have 
to take issue with is the assertion that the Bell companies were the 
most logical competitors of the other Bell companies. I would like 
to direct you, if I could, to my written testimony. One of the things 
I tried to do in preparing for this testimony to sort of test that was 
to go back into 1995 and look at what the Justice Department said, 
look at what the administration said, look at what the FCC said 
when they talked about who were the most likely people to get into 
the local exchange business. 

Now, the people they listed were the long distance carriers. They 
listed wireless companies, they listed cable companies. But as I 
point out in my written testimony, you can go through statement 
after statement, filing after filing, and the Government did not 
point to Bell companies as logical competitors to go into other Bell 
territory, and the reason for that, I think, is pretty logical. 

The reason is that in considering where you want to expand op- 
erations, you want to do that where you already have facilities in 
place, where you already have customer contacts, where you al- 
ready have name recognition. For example, in New York, AT&T 
has that. The cable companies have that. The long distance carriers 
have that. A lot of the wireless companies have that. I don't have 
that. I don't have any significant advantage, so that is why that is 
not a logical place for me to enter. 

Senator Feingold. Did you have any problem with my represent- 
ing, though, that the RBOC's had indicated an interest in compet- 
ing in each other's areas? Is that an accurate statement of what 
was, in part, part of the discussion? 

Mr. Young. Senator, as I grow older, my memory grows foggier, 
and the record is what the record is, but that is certainly not my 
recollection. 

Senator Feingold. Mr. Ellis. 

Mr. Ellis. Yes, Senator. I have a little bit different situation in 
my answer. As I said, our files confirm that we had no plans to go 
into California, and California had no plans — that is, Pacific Tele- 
sis — to come into SBC's territory. SBC has a presence in Chicago, 
Boston, Washington, Baltimore, and a major part of New York. We 
are active competitors with NYTMEX, Bell Atlantic, and Ameritech. 

I think that by most measures, we are probably among, anyway, 
their largest competitors, SBC is, no question about it, and we will 
grow that b siness in those areas. We have filed to be a local ex- 
change competitor in New York and in Illinois. We will be a full, 
one-stop provider — local exchange, long distance, and cellular — in 
those places. Our plan, however — and the reason we are not poten- 
tial competitors with Pacific Telesis is based on this. We believe it 
is important to have three components present before you move in. 
One, you need facilities. Two, you need branch identification. 
Three, you need customers. 

Now, not in every case — ^you can go ahead and try and go in, but 
when you have the opportunities we have to pursue the situations 
I have ticked off, plus others, we had chosen a long time ago not 
to go into California for those reasons. Our files — the Justice De- 



35 

partment has had them; they have looked at them; longstanding. 
That has been our plan. We were not a potential competitor for Pa- 
cific Telesis, but indeed we are a potential competitor in those situ- 
ations that I have outlined. 

Senator Feingold. Thank you. Let me go back to Mr. Young for 
a minute on the specific example of Bell Atlantic and NYNEX. It 
was a matter of public record some time prior to the announcement 
that there were discussions going on, and, I guess, what I would 
like to ask you is, Did Bell Atlantic first examine the competitive 
opportunities available to them in the NYNEX region, particularly 
in the States where your service areas abut one another? Was that 
examined or did you just go forward with 

Mr. Young. The answer to the question is, yes; we did examine 
that. Actually, you might be misled when you look at a map. You 
might think that our service territories abut all the way along the 
New York border, all the way along Pennsylvania. Actually, that 
is not true. A lot of that is independent telephone company terri- 
tory. Really, it is just New York and across the river to New Jer- 
sey. 

We looked at that, but we concluded pretty much along the lines 
that Mr. Ellis described that it wasn't worth the candle for us to 
go in because we did not have facilities in New York. We didn't 
have a customer presence, and we didn't think we had anything 
significant by way of brand identification. 

Now, even there you might say to yourself, OK, but, look, we 
have telecommunications facilities in northern New Jersey. 
Wouldn't we think we had some advantage? We could just extend 
the wires under the river and use that plant that we had in New 
Jersey to serve in New York. What we found out was that that was 
not the economical thing to do. There is already so much traffic in 
New Jersey and the area that you can serve with those facilities 
in New Jersey. Because of the traffic loads, you really can't extend 
into New York. So, yes; we did have a careful look at it, but we 
decided long before the merger discussions that this was not a mar- 
ket we wanted to enter. 

Senator Feingold. Do I have more time, Mr. Chairman? Just 
one more question, if I may. 

Senator THURMOND [presiding]. Yes. 

Senator Feingold. Thank you very much, Mr. Chairman. Just to 
follow on sort of what you were talking about there, you wouldn't 
have done this merger if it didn't involve sufficient cost efficiencies 
to be gained, and I saw in your press materials at the time of the 
merger announcement that the Bell Atlantic-NYNEX merger will 
result in cash savings of $900 million a year. Your press materials 
reported that would result in substantial shareholder value, but as 
far as I saw it didn't mention the benefits to consumers. 

How specifically will those cost savings be passed down to con- 
sumers, and what do you anticipate the average savings might be 
to ratepayers and how soon might those savings be realized? 

Mr. Young. Well, if I could take that question in pieces, first of 
all, even before the merger we think we have been doing a good 
job in passing along our efficiencies to our customers. We have in 
Bell Atlantic, in almost all our States, and NYNEX has in almost 
all their States — one exception is Vermont, where it is being nego- 



36 

tiated — price cap plans that basically freeze residential rates and 
gxiarantee that over the life of the plan, those rates will go down 
compared to inflation. Now, that is really sharing cost savings with 
customers. 

One other area, though, where I think customers are really going 
to see the benefit here, is in new services. You know, it is an ex- 
pensive proposition to build out our networks so that we can pro- 
vide new services and, for example, compete with the cable compa- 
nies. The greater size of the new company will be able to get equip- 
ment at better prices. This is particularly important when you are 
talking about cutting-edge equipment, new technology. You want to 
get your volumes up so you can get the unit costs down because 
that is the way this industry works. 

By putting the companies together, we are going to be able to get 
better prices to upgrade our network so that we can compete with 
the cable companies, and that also is going to provide a very real 
consumer benefit. 

Senator Feingold. I thank the chairman and simply want to say 
if there is any way I could get this quantified, and the timeframe, 
subsequent to this hearing — I have run out of time — I would appre- 
ciate it so I could get a little better sense of how the consumers 
will benefit. I thank the witnesses. Thank you, Mr. Chairman. 

Senator Thurmond. Mr. Young, Mr. Ellis, and Mr. Ebbers, in 
that order, will each of you please give us your views on concerns 
raised about whether local competition will ever broadly develop for 
business and residential customers, despite the best efforts of the 
Congress? While many large companies are currently interested in 
entry, is it clear, in your opinion, that robust local competition will 
ultimately be achieved? 

Mr. Young. 

Mr. Young. Yes; Mr. Chairman, I do believe there will be sub- 
stantial local competition. A lot, of course, along the way will de- 
pend on what regulators do. If I could point to something Mr. Ellis 
said a few minutes ago, I think there are a number of provisions 
of the FCC's section 251 interconnection order that — ^because they 
are going to require companies like mine to provide network ele- 
ments at below cost, I think those will actually interfere with the 
development of competition. But if I can for the moment assume 
away what I consider errors by regulators, yes; I think we will see 
significant local exchange competition. 

Senator Thurmond. Mr. Ellis. 

Mr. Ellis. Yes; I agree with that. I believe that what the Con- 
gress put in place will work if the FCC construes it in a correct 
way. I think that, unquestionably, the intent of Congress was to 
open both the local exchange that had previously been a regulated 
monopoly to full competition — they set in place the vehicles to do 
it — and at the same time they put a pathway for the regional Bell 
companies to get into long distance. They put great incentives on 
our part to cooperate, to make it happen, and I believe that ulti- 
mately it will work if the FCC implements the act as it was written 
by Congress. 

Senator Thurmond. Mr. Ebbers. 

Mr. Ebbers. I think that all depends, Mr. Chairman, on whether 
the Bell operating companies will get out of the courts and decide 



37 

to start complying with the interconnection order issued by the 
FCC and get on with the business of the day rather than the legal 
issues of the day. 

Senator Thurmond. As I indicated in my opening statement, I 
am interested in hearing views about how competition in local and 
long distance services may develop over the next few years, and 
particularly your estimates of the number of likely competitors 
with substantial shares of those markets. Would each of you care 
to comment? 

Mr. Young. Well, I will start, Mr. Chairman. It is going to vary 
substantially geography by geography. If you take the New York 
market today, you have about 20 significant competitors who are 
either certified or in the process of becoming certified and actually 
building facilities. In northern New Jersey, you have about the 
same number. We have significant numbers, and I would be happy 
to provide them for the record, if you would like, Mr. Chairman, 
in Philadelphia, in Pittsburgh, in Washington, DC, and Baltimore. 

As a matter of fact, today as we speak we are providing to Mr. 
Ebbers unbundled elements, as the act requires, in many respects; 
unbundled loops, for example, in Baltimore. How many there will 
be in any particular market — my crystal ball gets foggy a little way 
out, but I think it is pretty clear there will be a substantial number 
of people competing. 

Mr. Ellis. I agree with that. Senator, but I would like to com- 
ment on something Mr. Ebbers has suggested or implied twice, and 
that is that the regional Bell companies would not implement, or 
we are dragging our feet or would not provide compliance with the 
law. I would say on behalf of SBC that I have been general counsel 
for this company for 8 years and in that time, to my recollection, 
we have never had a finding by a regulatory body or a court that 
we have in any way refused to interconnect, degraded service, or 
in any way conducted ourselves that would justify a question about 
our fitness to hold licenses. 

We go before the FCC, we go before the States. We are subject 
to massive regulation of every type and, to my knowledge, there 
has never been a single situation, at least in the last 8 years, in 
which there has been a question of whether we would be in compli- 
ance with an FCC order or a congressional order. It is not in our 
interest to do so. We have provided interconnection arrangements 
for over 20 years to long distance competitors. We have provided 
them to cellular competitors, we have provided them to CAP's. We 
have a record that I am proud of. 

We receive laudatory comments on the quality of our inter- 
connections, and I think it has no place to suggest that we would 
do anything other than comply with the law. We disagree with the 
FCC's order, but as we sit here we are vigorously complying with 
that order, and will. As much as we think it is wrong and as much 
as we are going to take and pursue our remedies in the courts, we 
are going to comply with it as long as it is the law of the land. 

Mr. Young. Mr. Chairman, if I could add just briefly, because I 
know time is short, I would like to underline the last 

Mr. Ebbers. Mr. Chairman, it is my turn to speak, isn't it, sir? 



38 

Mr. Young. I just wanted to say we agree. The FCC order is cur- 
rently the law of the land. We have to comply with it. We are chal- 
lenging it, but we are complying with it. My apologies. 

Senator Thurmond. Mr. Ebbers. 

Mr. Ebbers. Mr. Chairman, the issue is one of economics, how 
many competitors there will be in the local market, and at a 17- 
to 25-percent discount for reselling bundled services, there will be 
very little competition in the local market because the cost of sell- 
ing those services — the overhead costs of selling those services do 
not provide enough margin to effectively get into that market, un- 
less you want to do it as a loss leader, and most of the time it is 
going to be very difficult to sustain a loss leader philosophy. 

If the FCC order is put into effect and we put in our own switch- 
es, that then allows us up to a 40-percent margin. It is also a fact 
that that margin will yield, because of the increased cost of provid- 
ing the services — some of the orders that we have to fill out are 
manual orders that are 16 pages long to get local service, and if 
we have to do that, then our overhead costs will increase substan- 
tially and there will be minimal competition on that basis. The rea- 
son for our merger with MFS is that we feel the only vehicle for 
us to compete profitably in the local service market is to build our 
own facilities. 

Senator Thurmond. Mr. Young or Mr. Ellis, if the modification 
of final judgment did not prohibit consolidation of Bell companies 
in the past, why did your companies not seek to merge sooner in 
order to capture the hundreds of millions of dollars of efficiencies 
that you believe will result from your pending mergers? 

Mr. Ellis. Well, Senator, our answer is very straightforward. We 
were concerned that we wanted to see what the legislation was 
going to be. As you may recall, for, I guess, the last two sessions, 
there were any number of different bills that came out and it was 
important to us to have some idea what the future would hold, 
what it would look like. 

Mr. Young. Mr. Chairman, I think Mr. Ellis is right. The legisla- 
tion accelerates the head-to-head competition with giants like 
AT&T, British Telecom-MCI, Sprint and its European partners, 
and it really accelerates the need for us to take a market response. 

Senator Thurmond. I believe my time is up. 

Senator Leahy. 

Senator Leahy. Thank you, Mr. Chairman. I have had, as we all 
have, to go back and forth to votes, but I understand in earlier tes- 
timony, Mr. Young, you had responded to some of the things that 
I had said, and we will go into that in just a moment. 

Mr. Young. Yes. 

Senator Leahy. And, Mr. Ellis, correct me if I am wrong on this. 
You testified that SBC and PacTel never had any intention to com- 
pete with each other. Is that correct? 

Mr. Ellis. That is correct, sir. 

Senator Leahy. And I have heard the same thing about Bell At- 
lantic and NYNEX. 

Mr. Young. That is correct. 

Senator Leahy. In fact, in testimony that Bell Atlantic filed be- 
fore the Vermont Public Service Board last Friday, it said that not 
only did the company have no plans to compete in Vermont as a 



39 

local exchange carrier, but it had no intention to compete any^vhere 
in the NYNEX region. Bell Atlantic, as I understand it, said New 
York City was perceived as already too competitive. 

Well, let's assume that New York City is too competitive, wheth- 
er it is or not. Then why did Bell Atlantic decide not to look at 
places such as Vermont, where most agree that such intense com- 
petition does not exist? 

Mr. Young. Mr. Senator, in looking at new markets to enter — 
I am at a risk of maybe repeating a little bit of what I had in my 
testimony. 

Senator Leahy. I understand. You just have to bear with me. I 
am new and young at this, but I will do my best to keep up with 
you, Mr. Young. 

Mr. Young. I appreciate that. When we look at a market for 
entry, we do what any business would naturally do. We look to see 
do we have some advantage; is there a reason for us to think that 
this is a place where we could do pretty well. When you are a tele- 
communications company, the factors that you look at are things 
like do you have significant brand recognition there; do customers 
know who you are; are you going to have to spend a lot of money 
just for people to get to know who you are. 

Senator Leahy. Did you feel that in Vermont people wouldn't 
know who Bell Atlantic was? 

Mr. Young. Compared to AT&T and MCI and Sprint, no. We 
think our brand recognition is substantially lower. You also look at 
things like do I have 

Senator Leahy. We even get newspapers up there, you know. We 
are out in the back woods, but we do know 

Mr. Young. Senator, I grew up in the country, too, so I appre- 
ciate that. But you also look at other factors like do you have facili- 
ties there; do you already have customer contacts and business re- 
lationships with significant customers. And when you look at a 
market like Vermont, we don't, and so that is why — when we look 
at a decision like that, that is the reasoning behind it. 

Senator Leahy. But intense competition was not one of the rea- 
sons, then? 

Mr. Young. Well, I will take your word for what the filing said 
and all I can say is 

Senator LEAHY. No; I am not saying what the filing said. Would 
intense competition not be a reason? 

Mr. Young. Well, certainly, if I thought there was a good market 
and I could be the first one in, sure, I am going to be more anxious 
to get into that market than if I think there is a market with three 
people or four people or seven people are already in there providing 
service. I think that is only logical. 

Senator LEAHY. Wouldn't everybody? 

Mr. Young. I think so. 

Senator Leahy. If you could have the monopoly, you would rath- 
er be there. 

Mr. Young. I am not talking about monopoly. I am talking about 
maybe being the first one in to compete with the monopolist. 

Senator Leahy. Well, we are going to have more monopolies to 
compete with as we go along, it appears to me, but let me ask this. 
The Telecommunications Act was expected to create this environ- 



40 

ment in which companies would compete in each other's markets. 
Now, I am told that a number of long distance companies and local 
access providers have filed for interconnection to the local phone 
networks of incumbent Bell companies in order to bring some kind 
of competition in the local loop. The Bell companies, of course, can 
do the same thing, but they haven't. 

Now, Mr. Ebbers, as I read your written testimony, you point out 
the irony that despite their expertise in providing local phone serv- 
ice, quote, "not one of the Bells' applications to offer service in an 
out-of-region State requests certification as a local carrier." Am I 
being fair? 

Mr. Ebbers. That is fair, sure. 

Senator Leahy. Is it correct that no Bell company has filed for 
interconnections with a local carrier outside of their own service 
territory? 

Mr. Ellis. That is not correct. Senator. 

Senator Leahy. It is not? 

Mr. Ellis. Southwestern Bell, SBC Communications, has filed in 
Illinois and New York. 

Mr. Ebbers. They really filed for long distance and you don't 
have to file a separate filing for local, so it kind of goes automati- 
cally in those two States. 

Mr. Ellis. That is not correct, Senator. We have filed to obtain 
a certificate to provide local exchange telephone service in Illinois 
and New York. 

Senator Leahy. Both of you gentlemen will — at some point, the 
staff will be provided with your testimony, but if you want to add 
to that or add anything to me on it, feel free. 

When was this, Mr. Ellis? 

Mr. Ellis. It was shortly before — and the record will be what it 
is, but I believe it was before the legislation was passed. 

Senator Leahy. And that is the only one? 

Mr. Ellis. Those are the two, Senator. I am not sure if you were 
here, but I said our plan, our practice, has been to file where we 
have network facihties, to compete where we have network facili- 
ties, where we have a brand name — Cellular One in Chicago, Cel- 
lular One right here in Washington, DC — where we have cus- 
tomers. That is the strategic plan that has been SBC's for a long 
time. Several years ago, the Department of Justice interviewed, de- 
posed, our people in connection with the motion to vacate. That 
was the testimony then and we have acted on that plan. 

Senator Leahy. Will we see more Bell companies trying to ex- 
pand local service under the Telecommunications Act, if you had to 
predict, Mr. Young? 

Mr. Young. Well, let me say this. One, I think that you come 
back to the criteria that both Mr. Ellis and I have been talking 
about. If a local exchange carrier or any other carrier has a logical 
platform in any particular local service area that allows them to 
enter — if they have facilities, if they already have customers there, 
if they have significant brand recognition — if they have several of 
those elements, yes, I think you will see that. If they don't have 
those elements, then I think it is a tough thing to do. 

Senator Leahy. Would you agree with that, Mr. Ellis? 



41 

Mr. Ellis. Well, I would say, Senator, that we have got a lot to 
deal with. As I mentioned, we have 115 requests for competitors to 
come in and provide local exchange in our 5 telephone States, and 
approximately 100 in California, and they are the biggies as well 
as the small ones. So I think we will look, in accordance with our 
strategic plan, at each situation. Will we come to Washington? I 
don't know, and I don't know the timetables. 

Senator Leahy. So you say it will be a case-by-case situation? 

Mr. Ellis. Within the criteria I said. One other thing. Senator, 
I would like to point out. The problem that Mr. Ebbers and others 
have talked about in terms of competing for local exchange is, in 
part, a product of the fact that historically local telephone rates 
have been kept very low. In Texas, for example, the State regu- 
lators have decided that the Texas telephone rate for 24-hour-a-day 
service is less than $10. Now, we didn't choose that. That was im- 
posed; that was the Texas regulatory policy decision. I wish they 
could be closer to cost, but that is what it is. So I can understand 
anybody coming in and saying, whether you have 20-percent dis- 
count off of $10 or what you have, that that is a problem. But it 
is not a problem that is a result of something SBC Communications 
did. 

Senator Leahy. If I was at all parochial, I would say you have 
got to have some advantage to live in Texas, but I am not going 
to say that. [Laughter.] 

Mr. Ebbers, did you want to add anything to this? 

Mr. Ebbers. No; Senator, I don't want 

Senator LEAHY. I take your point, Mr. Ellis. I don't mean to be 
flippant on that. 

Mr. Ebbers. I think Mr. Young and Mr. Ellis have clearly articu- 
lated the reason why we won't have effective local competition, 
RBOC in RBOC region. They come to it from a monopolistic atti- 
tude. You have to have a customer base already. They are not will- 
ing to go out and compete for one. You have to have facilities al- 
ready. They are not willing to go out and build them. They have 
to have name recognition already. They are not willing to go out 
and build name recognition. For our purposes, we are perfectly 
happy to start from the ground and work our way up. 

Senator LEAHY. Let me ask something in the long distance area, 
and to bring it back home. The Vermont Public Service Department 
issued a draft telecommunications plan for the State a few weeks 
ago and it said, quote, "Opportunities for combined long distance 
revenues appear to be the driving force behind," and it goes on to 
say "the NYNEX-Bell Atlantic merger." This somewhat puzzles me 
because the Telecommunications Act permits a Bell company to get 
into the long distance market in its own region only when it meets 
the interconnection and unbundling checklist, but the companies 
are free to go into the long distance market outside their own re- 
gion. 

Now, when you merge the companies and you dramatically in- 
crease the size of your region, it strikes me that you are, in fact 
delaying your own ability to offer some kind of long distance in 
your own regions? In other words, if Bell Atlantic didn't merge with 
NYNEX, it could begin offering long distance service in the NYNEX 



42 

area, or vice versa. But when they combine, then you have got to 
go through all these other hoops. 

Will the mergers, in fact, delay your entering the long distance 
market in the new combined regions? 

Mr. Young. Well, Senator, I think maybe another way of charac- 
terizing what you have just said is that because the merger in- 
creases our in-region footprint, what it does is increase our incen- 
tive to meet the checklist, to comply with the unbundling require- 
ments of the statute, because now the long distance carrot that we 
get by meeting all those requirements got bigger. 

Senator Leahy. So you are sajdng the mergers won't delay your 
entering the long distance market in the new combined regions? 

Mr. Young. Well, I think what they do is provide an even great- 
er incentive for us to meet the checklist, and we are very hopeful 
that we are going to be able to meet the checklist, market by mar- 
ket, promptly so that we can start providing some real price com- 
petition for the ordinary consumer that AT&T, MCI, and Sprint are 
not doing today. 

Senator Leahy. Is it your professional judgment that you are 
more apt to be into that market with a merger than you would 
have been otherwise? 

Mr. Young. Senator, my judgment is that I think we will prob- 
ably into the long distance market area by area on about the same 
schedule as we would have without the merger. 

Senator LEAHY. Do either of you gentlemen want to add to that? 

Mr. Ellis. No, sir. 

Senator Leahy. Mr. Ebbers. 

Mr. Ebbers. No, sir. 

Senator Leahy. Mr. Chairman, if I might just ask one last ques- 
tion on this, do the mergers help Bell Atlantic and NYNEX, PacTel, 
SBC, better compete in the long distance market? I mean, Mr. 
Young, you seem to think they would. 

Mr. Young. Yes. Let me take that. Yes, I think they will help 
us compete in the long distance market. One of the reasons I say 
that is that an enormous cost of doing business in this industry is 
the cost of the equipment. Now, one of the things that you find out 
very quickly in this business is that if you want to get equipment 
at good prices, volume is everything. The bigger the volume, the 
better the price you get. That is true of cutting-edge, high-tech- 
nology equipment, like the equipment that we are going to be in- 
stalling in our networks so that we can provide video, for example. 
But it is true of other equipment as well. 

So I think, for that reason alone, the equipment savings, yes, this 
does help us in the long distance market, but it helps us in a num- 
ber of other areas as well — development of systems, development of 
other technology that we will need to be in the business. The econo- 
mies of scale and scope do make a difference, yes. 

Mr. Ellis. I would just add to that to say that one of the reasons 
that we found the merger attractive with Pacific Telesis is they 
have a very strong, excellent cost performance shop. We believe we 
have an equally strong revenue-generating, marketing, product de- 
velopment shop. We put those two together and we think we have 
a very strong company that can go into — and I am sorry; before, 
I said we weren't in the long distance business. We are not in the 



43 

long distance business that we can't be in, the interLATA long dis- 
tance business. 

So we are going to start from zero, and we think that combina- 
tion will make for a strong competitor, along with the other mat- 
ters of scale that Mr. Young has talked about. I would again stress 
we are starting at zero, going into that long distance market. 

Senator Leahy. Well, Mr. Chairman, I know you want to move 
on and we are going to have other votes, and I will submit, if I 
might, my other questions for the record. I do have a number of 
other questions, but I will submit them for the record. 

Senator Thurmond. Thank you. 

[The questions of Senator Leahy are located in the appendix.] 

Senator Thurmond. Before we move to the next panel, Senator 
Feingold, I believe you had a question. 

Senator Feingold. Mr. Chairman, I appreciate it very much, and 
I regret that I can't be here for the second panel, so I hope Mr. At- 
kinson, who is going to testify on the panel, doesn't mind if I just 
read a brief comment that he makes in his testimony and I would 
like Mr. Young's and Mr. Ellis' reaction. 

He attaches an illustrative list of minimum standards to be at- 
tached to any merger approval that TCG believes to be reasonable 
and appropriate. He says, "How could a company of good intention 
object to this proposal? If the big Bell or any BOC, for that matter, 
intends to live up to the requirements of the Telecommunications 
Act, it should have no difficulty in committing to strict performance 
standards." 

So with regard to this comment, TCG suggests that it should be 
easy to agree to minimum performance standards if the BOCs 
aren't anticipating service problems during the transition period. 
How do you gentlemen respond to that? 

Mr. Young. Senator, since I don't have the specific suggestion in 
front of me, it is a little hard to comment, but I don't want to hide 
behind that. 

Senator Feingold. Well, let me be fair to you. It has to do with 
keeping the local exchange competition whole relative to the level 
of performance and service that existed before the merger. 

Mr. Young. Well, on that issue, we have a number of inter- 
connection agreements that we have been able to enter into, and 
the issue of service performance and accountability and liability in 
the event that our service performance doesn't meet particular lev- 
els — at least so far, with at least some providers, we have been able 
to negotiate mutually acceptable agreements. So at least in the 
past, this hasn't been a problem. 

Now, I will tell you based on my exposure to this that, you know, 
some parties have been demanding service levels and liability lev- 
els that we think are just completely out of market. But when peo- 
ple have come in with reasonable requests, it has been very easy 
for us to split the difference and reach an agreement. 

Senator FEINGOLD. So this could well, in the proper context, be 
a reasonable proposal? 

Mr. Young. It can, and I think it is most effectively dealt with 
in the structure that Congress has set up, negotiations between the 
parties with the oversight of the State regulators. 

Senator Feingold. Mr. Ellis. 



44 

Mr. Ellis. Well, I would just add to that. We have 17 inter- 
connection agreements, and they are negotiated one by one and 
they are private negotiations under the auspices of the States. In 
some of those agreements, the parties have negotiated both stand- 
ards of performance and even liquidated damages. 

But on this point, I will go back to what I said before. We, for 
many years, have looked at the whole area of interconnection, par- 
ticularly with the number of customers — and that is what I will 
call them, carriers — that we have. We have performance standards, 
we have capabilities. They can come in and online monitor the 
quality of the access. This is an area we get rated by the FCC. 
They rate us, all the carriers. 

At predivestiture, pre- 1984, there could have been arguments, 
but this has not been, I submit, in the relatively — well, I will use 
8 years — this has not been an area of controversy. 

Senator Feingold. Is this the kind of thing you would agree to, 
then, as a condition for merger? 

Mr. Ellis. It is absolutely not the kind of thing we would agree 
to as a condition for merger. We believe, unquestionably, this merg- 
er should be held to the same standard that the AT&T-McCaw 
merger was, that the MCI-BT, that the Sprint — I could go down 
the whole list, Disney, and so on — the law ought to be the same 
for everyone. What I am saying is under the act that was passed 
by Congress, that is a matter for private negotiations and it has 
worked. We have had 17 agreements with big and small, including 
people like Time Warner and MFS. So I am saying the process was 
working. The problem has come up because of FCC has gone off 
and tried to reregulate the system with a 700-page, single-spaced 
order. That is the problem. 

Senator Feingold. Mr. Chairman, we will pursue this again an- 
other time and I thank you very much for the extra time. 

Senator THURMOND. Thank you, gentlemen, for your appearance. 

We will now have the second panel come around — Mr. Michael 
Salsbury, Mr. William Barr, and Mr. Robert Atkinson. We will give 
each of you 5 minutes to make an opening statement, and please 
confine it to 5 minutes. You can put your entire statement in the 
record. 

Mr. Salsbury, you may start. 

PANEL CONSISTING OF MICHAEL H. SALSBURY, EXECUTIVE 
VICE PRESIDENT AND GENERAL COUNSEL, MCI COMMU- 
NICATIONS CORP., WASHINGTON, DC; WILLIAM P. BARR, 
SENIOR VICE PRESIDENT AND GENERAL COUNSEL, GTE 
CORP., STAMFORD, CT; AND ROBERT C. ATKINSON, SENIOR 
VICE PRESIDENT, LEGAL, REGULATORY AND EXTERNAL AF- 
FAIRS, TELEPORT COMMUNICATIONS GROUP, INC., STATEN 
ISLAND, NY 

STATEMENT OF MICHAEL H. SALSBURY 

Mr. Salsbury. Thank you, Mr. Chairman and members of the 
committee. My name is Michael Salsbury and I am executive vice 
president and general counsel of MCI Communications Corp. It is 
a privilege to testify before this committee today, and permit me 
at the outset, Mr. Chairman, to acknowledge the exemplary leader- 



45 

ship of members of this committee to ensure that the act recog- 
nized the critically important role of the Department of Justice in 
protecting and promoting competition in telecommunications mar- 
kets. 

Development of competition in the long distance industry since 
the breakup of the Bell System in 1984 pursuant to the MFJ is an 
extraordinary American success story. The changes spurred on by 
DOJ and the FCC gave American consumers and businesses mul- 
tiple choices for long distance telephone service. Both large and 
small entrepreneurial companies now compete vigorously in the 
long distance industry. 

The long distance cartel referred to by Mr. Young at this point 
has more than 500 members, has so far escaped detection by Fed- 
eral and State competition authorities, and to date has been visible 
only to local exchange monopolists and their paid experts. Since 
1984, long distance prices have declined almost 70 percent. Innova- 
tive long distance services, such as virtual networks, fax, and the 
Internet, have been introduced. Call quality has increased and cus- 
tomer service has improved dramatically. 

Unfortunately, the MFJ did not address competition in local tele- 
phone service markets. These markets remain monopolies domi- 
nated by the seven RBOC's and GTE, which provide more than 99 
percent of all the local telephone services in their service terri- 
tories. Compared to the 42 million times customers changed their 
long distance carriers last year, no more than a handful of cus- 
tomers could obtain local service from more than one carrier. 

Against this background, the intent of the act was, first, to pry 
open local telephone markets to competition and to reform and ad- 
vance universal service arrangements so as to eliminate the cur- 
rent massive subsidy flows; and, second, once local markets were 
opened and effectively competitive, to promote further diversity and 
choice in long distance by permitting the RBOC's to enter the long 
distance market within their regions. 

For the act's goals, two things are critically important. First, 
Federal and State regulators must implement the act in a manner 
consistent with Congress' procompetition intent. The FCC is off to 
the right start with its interconnection order issued last month. 
Yet, much of the implementation effort lies ahead. Because not one 
of the RBOC's or GTE has entered into a single interconnection 
agreement that meets the requirements of the act and the FCC's 
rule, the act now requires each State separately to outline those 
agreements in lengthy arbitration proceedings. This process will, 
no doubt, be further complicated by the appeals from the inter- 
connection order filed by each of the RBOC's and GTE. 

The second critical factor is DOJ's continuing role in ensuring 
that the evolution to competition in local markets does not jeopard- 
ize long distance competition either by premature entry of the 
RBOC's into the long distance market while they still remain mo- 
nopoly power or by combination of RBOC monopolies that can 
delay and possibly frustrate development of local competition en- 
tirely. 

We have met with representatives of the Antitrust Division and 
can report that they are preparing to carry out their statutory re- 
sponsibilities in reviewing the RBOC applications for long distance 



46 

entry. The proposed mergers of Bell Atlantic and NYNEX and of 
SBC and Pacific Telesis, however, are very troubling and should be 
opposed. If permitted to proceed, these mergers would impede the 
development of local competition in each of these RBOC's regions 
and would create a substantial likelihood that the resulting mega- 
RBOC's would leverage their local monopolies to gain market 
power in the long distance market. 

Although local telephone service remains a highly concentrated 
market, in no instance have RBOC's ever competed with each other 
in the provision of regular telephone service. In fairness, in the 
past State laws have often prevented that, but the act eliminated 
all such legal constraints. With the prospect of increased revenues 
and profits from the out-of-region business of their customers 
alone, one would expect to see demands for interconnection from 
other RBOC's and the beginnings of RBOC competition. After all, 
who better to compete in local service markets than the experi- 
enced, well-financed companies that have been doing it for 100 
years? 

Why, for example, wouldn't Bell Atlantic, which provides residen- 
tial service to many New York executives, not try to win the tele- 
phone service of their businesses away from NYNEX? If Bell Atlan- 
tic wasn't interested in New York and SBC wasn't interested in the 
business in California, why are they buying these companies? This 
is, in fact, the justification Bell Atlantic gave some years ago when 
it tried to merge with TCI. At that time, Bell Atlantic's economists 
said that the only possible purpose and consequence of the merger 
would be to mount a direct competitive challenge across the board 
to the incumbent telephone companies, predominantly other BOC's. 
They are not saying that now. Why not? 

I just might quickly conclude. The reason is that if they go into 
the other territories and demand interconnection, the other — if Bell 
Atlantic went into NYNEX' territory or if Southwestern Bell went 
into Pacific's, then the other companies would retaliate. They 
would demand interconnection from the other company and they 
would immediately start competing against each other, bringing 
local competition that much quicker. The answer to the monopo- 
lists' dilemma, Mr. Chairman, was to merge, not compete. 

Thank you. 

[The prepared statement of Mr. Salsbury follows:] 

Prepared Statement of Michael H. Salsbury 
executive summary 

It is a privilege to testify before the Committee on the state of competition in the 
telecommunications industry following enactment of the Telecommunications Act of 
1996. I'd like to acknowledge the exemplary leadership of members of this Commit- 
tee to ensure that the new law recognized the critically important role of the De- 
partment of Justice (DOJ) in protecting the promoting competition in the tele- 
communications marketplace. 

MCI is uniquely situated to speak about competition in the industry because more 
than 25 years ago we successfully challenged the Bell System monopoly and brought 
competition to the long distance industry. We have experienced first-hand the anti- 
competitive shenanigans that an incumbent monopoly can engage in to frustrate 
new entrants that are trying to interconnect with its network and compete for cus- 
tomers. We know why it so necessary not only to have fair rules of the game but 
why you need the referees on the field for enforcement. 

The Act holds the potential to spur the same kind of consumer benefits in the mo- 
nopoly local market that long distance competition brought. Today, consumers have 



47 

many choices in long distance providers and rates have fallen nearly 70 percent over 
the last decade — the same long distance call that cost $1.77 (in 1994 dollars) ten 
years ago, would cost less than 58 cents today. The same is not true in the local 
telephone market dominated by the seven Regional Bell Operating Companies 
(RBOC's) and GTE. Their monopoly power and their ability to act anticompetitively 
is why the new rules of the game and the enforcement mechanisms are critical to 
realizing the goal of full competition in every telecommunications market. My testi- 
mony focuses principally on two areas of concern — the implementation of the Act 
and how the proposed RBOC mergers will harm competition. 

Seven months after the passage of the Act, little in the local marketplace has 
changed. Consumers only have one choice for their local service provider. The in- 
cumbent monopolies, while crying that they are facing competition, are doing every- 
thing possible to thwart new entrants and kill its development. Within a month of 
the Federal Communications Commission's (FCC) issuance of new local competition 
rules, the incumbent monopolies have begun an enormous legal battle seeking to 
block the implementation of the Act. The monopolists' tactics of stall, disrupt and 
delay are exactly why we must have fair rules and good enforcement of the rules 
and playing conditions. In the near term, regulation must play its role as a sub- 
stitute for competitive processes until true local competition — and market forces — 
fully develop. 

The FCC is off to a good start in issuing its August 1 local competition rules, but 
these rules are only one part of a three part trilogy of necessary reforms. The trilogy 
must include: 

National Local Competition Rules — ^Adoption of national rules to foster local com- 
petition throughout the U.S. 

Universal Service Reform — A competitively-neutral universal service plan that in- 
creases the number of Americans on the network, provides access to basic and ad- 
vanced services, eliminates hidden subsidies, ensiu-es that all players contribute in 
an equitable manner and ensures that local service remains affordable in all areas 
of the country. 

Access Charge Reform — Reform of access charges which currently result in long 
distance companies paying nearly half of every dollar to incumbent local monopolies. 
These charges are seven times the cost of providing access. Competition will not de- 
velop unless these charges reflect the true price of providing access to the incum- 
bent's network. 

As noted, the Act recognizes DOJ's preeminent role in safeguarding national pro- 
competition policies. In this regard, DOJ must critically examine the proposed merg- 
ers of Bell Alantic/NYNEX and SBC/PacTel. MIC views these proposed mergers as 
inconsistent with the pro-competition intent of the Act and in violation of our na- 
tional antitrust principles. These mergers should be opposed. If these RBOC merg- 
ers were allowed, our nation would lose two powerful and resourceful competitors, 
both of which would likely be new entrants into the local markets now being served 
on a monopoly basis by their merger partners. Bell Atlantic-NYNEX would control 
25 percent of the nation's access lines to customers and SBC-PacTel would control 
21 percent. In other words, two huge monopolies would have bottleneck control of 
more than 45 percent of the nation's phone lines. These combined "mega-RBOC's" 
would also have a much greater ability to engage in anticompetitive activity if al- 
lowed to provide interLATA long distance service in their huge new intraregion 
markets because of the large proportion of calls on which they control both ends of 
access (i.e., calls that both originate and terminate within the new larger regions). 

Assuming that the efforts of incumbent monopolists to thwart it fail, the develop- 
ment of local competition promised by the Act, one properly implemented, can 
produce the same kinds of consumer benefits that competition in the long distance 
market produced following the break-up of the Bell System — and more. 

Mr. Chairman, actions taken by the FCC and DOJ in the coming months will in 
large part determine whether or not the Act's competitive goals — and the benefits 
to consumers that competition brings — are realized. To date, we have seen the 
RBOC's going to court, refusing to sign interconnection deals that meet the Act's 
competitive checklist, and doing all in their power not only to retain, but in the case 
of these proposed mergers, to expand their monopolies. I commend you for your dili- 
gence in publicly examining issues and I appreciate this opportunity to appear be- 
fore the committee. 



Good morning, Mr. Chairman and members of the Committee. My name is Mi- 
chael H. Salsbury. I am Executive Vice President and General Counsel of MCI Com- 
munications Corporation. It is a privilege to testify before this Committee on the 



48 

state of competition in the telecommunications industry following enactment of the 
Telecommunications Act of 1996 (Act). 

Permit me at the outset, Mr. Chairman, to acknowledge the exemplary leadership 
of members of this Committee to ensure that the new law recognizes the critically 
important role of the Department of Justice (DOJ) in protecting and promoting com- 
petition in the telecommunications marketplace. 

No one can question MCI's long-standing commitment to achieving full and fair 
competition in all telecommunications markets. MCI was the pioneer of competition 
in the telecommunications industry — first in long distance and now in local tele- 
phone markets. MCI has grown from a tiny upstart challenging the Bell System to 
an industry leader. In the process, MCI has become a diversified communications 
company offering consumers and businesses a range of services including long dis- 
tance, wireless, local access, paging, Internet access, and more. MCI will continue 
to provide the innovative services oiu- customers demand, including local telephone 
service, but can do so only if the Act is properly implemented and if regulators pre- 
vent anticompetitive behavior on the part of incumbent monopolies. In order to be- 
come a facilities-based competitor to the incumbent telephone monopolies, MCI cre- 
ated a subsidiary, MCImetro. If the right rules are in place and arbitrations with 
the Regional Bell Operating Companies (RBOCs) are successful, by early next year, 
MCImetro will have grown to operating local switches in 24 markets in 20 states. 

INTRODUCTION 

For decades, the telecommunications industry was dominated by the former Bell 
System monopoly. Twelve years after the break-up of the Bell System, long distance 
is a highly competitive market with hundreds of competitors and prices that have 
decreased nearly 70 percent. The local telephone markets, however remain monopo- 
hes dominated by the seven RBOCs and GTE. The Act holds enormous potential for 
bringing competition to these monopoly markets, and while MCI is optimistic that 
this historic legislation will achieve that goal, it is far from a foregone conclusion. 
Several critical events must occur before that will even be possible. My testimony 
will focus principally on two areas that require special attention: implementation of 
the Act (a "trilogy" of key regulatory decisions) and the proposed RBOC mergers. 

First, the Act must be properly implemented by both federal and state regulators 
in a way that is consistent with Congress' pro-competition intent. While the Federal 
Communications Commission (FCC) if off to the right start with the August 1 re- 
lease of its local competition rules, much of the Act's implementation lies ahead. Not 
a single state has arbitrated an interconnection agreement pursuant to Section 252 
of the Act. Moreover, FCC decisions in two key proceedings — universal service and 
access charge reform — are still months away. These two items, together with suc- 
cessful implementation of local competition rules, form what the FCC has labeled 
a "trilogy" of key decisions needed to launch local competition and preserve long dis- 
tance competition. If successfiilly executed, this trilogy promises to bring lower 
prices and innovative telecommunications services to all Americans. 

Second, certain pending industry mergers will harm competition and impede 
achievement of the Act's goals. The Act opens to competition a $500 billion commu- 
nications and information market with exploding growth potential. Many players in 
this market, including MCI, have and will form alliances to offer innovative new 
products and services and increased geographical reach. We do not assert that such 
economic activity should be discouraged. To the contrary, joint ventures and merg- 
ers may strengthen competition in the market. Not all mergers, have such beneficial 
results. 

MCI views the proposed mergers of Bell Atlantic with NYNEX and SBC Commu- 
nications (SBC) with Pacific Telesis (PacTel) as inconsistent with the pro-competi- 
tion intent of the Act and in violation of our national antitrust principles. These 
mergers should be opposed. If these RBOC mergers were allowed, our nation would 
lose two powerful and resourceful competitors, both of which would likely be new 
entrants into the local markets now being served on a monopoly basis by their 
merger partners. Bell Atlantic-NYNEX would control 25 percent of the nation's ac- 
cess lines to customers and SBC-PACTel would control 21 percent. In other words, 
two huge monopolies would have bottleneck control of more than 45 percent of the 
nation's phone lines. These combined "mega-RBOCs" would also have a much great- 
er ability to engage in anticompetitive activity if allowed to provide interLATA long 
distance service in their huge new intraregion market because of the large propor- 
tion of calls on which they control both ends of access (i.e., calls that both originate 
and terminate within the new larger regions). 

Assuming that the efforts of incumbent monopolists to thwart it fail, the develop- 
ment of local competition promised by the Act, once properly implemented, can 



49 

produce the same kinds of consumer benefits that competition in the long distance 
market produced following the break-up of the Bell System — and more. 

LONG DISTANCE COMPETITION BENEFITS THE ECONOMY & CONSUMERS 

Mr. Chairman, the development of competition in the long distance industry since 
the break-up of the Bell System is an extraordinary American success story. The 
changes spurred on by the DOJ and the FCC gave American consumers and busi- 
nesses multiple options for long distance telephone service. Both large and small en- 
trepreneurial companies now compete vigorously in the long distance industry. * 

The development of a highly competitive long distance industry has been a boon 
for the U.S. consumer. A 1995 study ^ by Dr. Robert Hall of Stanford University con- 
firmed what the world already knew — that long distance competition created hun- 
dreds of new businesses as new carriers entered the market, stimulated an unprece- 
dented surge in technological innovation, and caused call quality to soar as long dis- 
tance companies criss-crossed the nation with fiber optic networks that today com- 
prise the Information Superhighway. In addition, and perhaps most importantly, 
competition drove real long distance prices to American consumers down by almost 
70 percent between 1985 and 1995. The same long distance call that cost $1.77 (in 
1994 dollars) ten years ago, costs less than 58 cents today. 

Notwithstanding the facts, the RBOCs argue that the long distance industry is 
not competitive.^ This view appears to be motivated more by a desire to influence 
public policy than by a reasoned and impartial evaluation of the facts; it is notori- 
ously wrong. Since 1995, while the RBOCs were spreading their propaganda to pol- 
icy makers, many on Wall Street realized that the firms in the long distance indus- 
try were vigorously fighting for market share through price competition, quality im- 
provements, and new and innovative service offerings. 

FCC figvu-es also demonstrate vigorous long distance industry competition. AT&T 
market share measured by revenue slipped almost one percentage point in the first 
quarter of 1996 to 55.1 percent, continuing the downward trend from 90 percent at 
divestiture in 1984; 67 percent in 1989; and 61 percent in 1993. Measured by traffic 
revenue, AT&T's share is now approaching 50 percent. 

Change in market share, however, does not teU the whole story. Market share re- 
flects only net customer turnover; if AT&T loses a customer to one long distance 
competitor but wins one from another, its market share remains the same. The ac- 
tual turnover is a more accurate barometer of competition and it demonstrates ex- 
treme rivarly — long distance customers changed carriers over 42 milHon times in 
1995, with a faster pace of turnover exhibited in the first quarter of 1996. In addi- 
tion, smaller carriers continue to gain an increased share of the market. The FCC 
reports that "third tier" carriers have increased their share of the market revenue 
fivefold, from less than three percent in 1984 to more than 14 percent in 1995. The 
ability of new entrants to rapidly build market share is reflective of an open and 
competitive, rather than a non-competitive, market. 

In addition to presenting misleading facts on market share in the long distance 
industry, the MacAvoy study's core conclusions are based on an analysis of long dis- 
tance prices and costs that is totally flawed. According to the study, long distance 
prices are well above costs and the margin has been increasing over time. The two 
mndamental problems with the analysis are its pricing and cost data. There are sev- 
eral problems with the pricing analysis. First, it overstates consumer rates by ignor- 
ing important residential discount plans — such as the MCI "Sure-Savings," the 
AT&T "True Savings," and other discount plans. Second, it makes incorrect calling 
pattern assumptions. 

It assumes that 85 percent of residential calls are made during the day, which 
is flatly incorrect and causes a gross overstatement of average residential prices. 
Third, it overstates business rated by ignoring business contract tariffs. Incredibly, 
the cost data leaves most of the costs incurred by long distance companies out of 
the equation — that analysis excludes billing, promotion, advertising, and most net- 

1 In Utah and South Carolina, 27 long distance companies provide customized service to con- 
sumers and small businesses. In Texas, more than 100 companies offer a variety of long distance 
services. More than 70 companies compete in Pennsylvania and Illinois. In California, Michigan, 
Ohio, New York, Wisconsin, and Florida, more than 50 long distance companies are today offer- 
ing service. 

■^ Long Distance: Public Benefits from Increased Competition, 1995. 

3 The RBOCs are promoting the findings of a book by a paid economic consultant (Paul W. 
MacAvoy, The Failure of Antitrust and Regulation to Establish Competition in Markets for Long- 
Distance Telephone Services (Cambridge, MA: The MIT & AEI Press, 1996)) which concludes 
that the long distance companies have "stabilized" their market shares and have gotten so good 
at "signaling' what their prices will be that competition is not effective at lowering prices. Un- 
less and until, of course, the RBOCs gain entry into the long distance market. 



50 

work costs. With the data errors corrected, the conclusions reached are the opposite: 
long distance prices have fallen dramatically over the last decade and that decline 
has outstripped the decline in access charges by a wide margin. 

LOCAL TELEPHONE MARKETS ARE STILL DOMINATED BY MONOPOLIES 

In marked contrast to the vigorously competitive long distance industry, there 
was no meaningful competition in local telephone markets when the Act was signed 
into law in February. Until preempted by Section 253 of the Act, local competition 
could not exist because most state prohibited competition by law or regulation. The 
House Commerce Committee Report noted that "the seven BOCs control over 80 
percent of the local telephone network," "the top 10 telephone companies control 
over 92 percent of the local telephone network," and "in the large number of mar- 
kets for local telephone service tnere was no instance where any of the top 10 tele- 
phone companies compete with one another.""* Although a key objective of the Act 
is to bring full and open competition to the local market, little has changed in the 
last seven months. The $95 billion local telephone market is still dominated by mo- 
nopolies. 

In any given geographic area, only one company provides the conectivity that al- 
lows users to communicate wfith one another through the telephone. Anyone who 
wants telephone service-local or long distance-has to rely on the local telephone 
company to provide that conectivity. The RBOCs continue to monopolize both as- 
pects of local telephone service in their serving areas: local exchange (calling friends 
and family across town) and exchange access (connecting you to your long distance 
phone conipany for long distance calls). 

The RBOCs claim that they have been facing significant competition for exchange 
access traffic. Long distance companies pay about 40 percent of every revenue dollar 
for access. Approximately 99.4 percent of those dollars go to the local telephone mo- 
nopolies. Industry-wide, long distance companies' payments to local monopolies last 
year exceeded $20 billion. MCI's access payments alone exceeded $5 bilhon. Com- 
pared to the billions of dollars paid to the RBOCs, MCI paid only $25 million — less 
than four tenths of one percent — to competitive access providers, or competitive local 
exchange carriers (CLECs). Competition in this market is far from a reality. More- 
over, the RBOCs continue to experience growrth in their access traffic volumes. In 
the last three years local telephone company access traffic has grown by more than 
seven percent a year. Even in two states where the presence of CLECs would be 
most likely to erode local telephone company access business — Illinois and New 
York — interstate access traffic growth for Ameritech and NYNEX has been about 
the same as the rest of the country. 

The tiny pockets of emerging competition, which the RBOCs prefer to show 
through a magnifying glass to overstate their importance, do not today provide con- 
sumers with choices for local telephone service. Ironically, at the same time the in- 
cumbent monopolies are crying "competition," they are doing everjdhing possible to 
squelch its development. 

Monopoly behavior stifles competition 

The RBOCs and GTE are doing everything possible to stifle competition in court, 
in the regulatory process, and in the marketplace. Barely a month has passed since 
the FCC issued its new local competition rules and the incumbent monopoUes have 
already initiated a legal battle against the implementation of the Act. GTE and 
Southern New England Telephone (SNET) have sought to stay the effective date of 
the FCC's local competition rules, arguing that they will be damaged if the rules 
take effect. Last week, US WEST, Bell Atlantic. NYNEX, PacTel, and BellSouth pe- 
titioned the U.S. Court of Appeals for the District of Columbia to overturn the FCC's 
order, as did GTE. SBC filed a similar petition in the Court of Appeals for the Fifth 
Circuit in New Orleans. Although MCI believes that the stay applications wall fail, 
this is yet another example of the incumbent monopolies' attempt to impede the 
competition process. 

While the Act creates affirmative obligations on the part of the RBOCs to open 
their markets to competition, the interconnection agreements that have been signed 
between the RBOCs and their potential competitors are few and interim in nature 
and with companies interested primarily only in terminating traffic over the 
RBOCS' networks. Not one of the agreement addresses of all the local competition 
issues that Congress mandated. 

The fact is, of the forty or so interconnection agreements that have been nego- 
tiated very few even address all fourteen items of the competitive checklist set forth 



-«H. Rep No. 104-204, 104th Cong., 1st Sess., at p. 50 (emphasis added). 



51 

in Section 271 of the Act. Those that do fall short either in the pricing requirements 
of the Act, or by requiring certain restrictions on resale or unbundled elements.'"' 

MCI and other new entrants have been forced to sign limited interim agreements 
to interconnect with the incumbent monopoly's network. Since these agreements are 
deficient, key elements — such as pricing terms for resale of local service — must be 
renegotiated. Because negotiations with the RBOCs have led nowhere, MCI and new 
competitors are forced to go to arbitration. MCI has filed for arbitration in 28 states. 
TCG, MFS and AT&T have all filed petitions requesting arbitration with the 
RBOCs. 

A competitive marketplace naturally works against such anti-competitive abuses. 
When several vendors compete for MCI's business, they are responsive to our needs. 
But when MCI and other competitors must still rely on the monopoly RBOCs to 
reach our customers, bad things can happen. Consider these two examples: 

Bad Faith Dilatory Tactics. — The RBOCs have used delaying tactics since passage 
of the Act to stifle competition. In April, we sent each RBOC (and each state com- 
mission) our Term Sheet, listing the items we needed from them in order to provide 
local service. The RBOCs' response was to refuse to talk to us without a gag order 
on the negotiations, forcing us to seek mediation. Recently, with the leadership of 
the Michigan Public Service Commission, Ameritech retreated from that position 
and has begun to talk to us. But, we spent from March to July without engaging 
in any serious pricing negotiations based on their unreasonable insistence on put- 
ting MCI under a gag order. 

Refusal to Negotiate. — Bell Atlantic has refused to negotiate an interim agreement 
in New Jersey, despite agreeing to one in Pennsylvania. While we are ready to begin 
service and offer competitive choices to New Jersey customers, our switch there lays 
dormant because of Bell Atlantic's refusal to negotiate. Similar inconsistent posi- 
tions have been taken in different states by US WEST and GTE. In addition. Bell 
Atlantic has refused to provide us with any pricing/costing information unless we 
agree not to disclose it to anybody. 

Such behavior is not indicative of a competitive market. It represents the tried 
and true tactic of a monopolist — deter, disrupt, and delay. It is nothing but a fla- 
grant attempt by the RBOCs to preserve their monopolies. If successful, these delay- 
ing tactics would mean that consumers would have to wait years for the benefits 
local competition will bring: lower prices, more choices and better service. This pro- 
monopoly behavior is inimical to the purposes of the Act and demonstrates the im- 
portance of regulators, both federal and state, managing the transition to competi- 
tion. Before discussing the FCC's challenge in implementing the Act, I'll briefly de- 
scribe the "navigational tools" regulators need. 

NAVIGATIONAL TOOLS NEEDED TO JUMP START LOCAL COMPETITION 

In the months ahead, regulation must play its role as a substitute for market 
forces until true competition arrives. Regulatory oversight is needed to ensure that 
the proper safeguards are in place during the transition from a single-provider mo- 
nopoly market to a competitive one. Regulators should employ a simple and 
straightforward set of navigational aids to set the course toward true competition 
in local markets by asking, of each regulatory action: Does it create an environment 
that promotes investment and the development of an array of new services? Does 
it establish prices that mirror a fully competitive environment? Does it provide vigi- 
lant oversight against anti-competitive practices? 

These are the navigational aids that will lead to open, competitive markets. En- 
forcement measures must be simple, yet allow for decisive and swift action by ag- 
grieved parties (presumably new entrants). The measures should not require con- 
stant policing or modification and should incorporate incentives and disincentives 
for just and reasonable resolution of complaints. They must also allow state and fed- 
eral regulators to render fair and unambiguous decisions that may be implemented 
without untoward delay or confusion. Vigilant oversight means: 

Establishing specific deadlines. — For example, both the new entrant and the in- 
cumbent telephone company should know the number of days by which an order for 
unbundled network elements must be filled. 

Specifying what will — and will not — satisfy the rules. — In other words, ambiguity 
in the rules will only serve to delay competition. 



5 For example, MFS has signed Section 252 agreements with the following RBOCs: SBC, 
Ameritech, NYNEX, and Bell Atlantic. The agreements do address most issues but have short- 
comings with respect to specific terms and conditions such as resale (restrictions apply; not 
priced based on avoided cost pricing, etc.) or access to network elements. 



52 

Establishing and enforcing easily-calculable penalties for non-compliance. — Parties 
should be clear that unacceptable actions will be met with inescapable and severe 
reactions. An adjudicatory proceeding bogged down with questions of intent and mo- 
tivation is slow and arduous, which creates an incentive for delay. On the other 
hand, easily-applied sanctions that penalize unacceptable and discriminatory behav- 
ior will create the appropriate incentives for compliance. For example, pursuant to 
the Act, any carrier caught "slamming" will lose any charges that it unlawfully re- 
ceived. Similarly, any local competitor that fails to satisfy a customer's order to 
change his/her local service provider should also forfeit all charges assessed to the 
customer since submission of the order (including access charges). Ineffective en- 
forcement in implementing rules will significantly delay local competition. 

So far, the FCC has made a good start in its implementation of the Act, but many 
challenges lie ahead. 

IMPLEMENTATION OF THE ACT: THE CRITICAL REGULATORY "TRILOGY" 

Recognizing that the transition from monopoly to competition could not occur 
overnight. Congress established a detailed schedule and sequencing of key events 
in the Act that, over the next few years, have the potential for unleashing the full 
force of telecommunications competition on the U.S. economy. As Congress provided 
and the FCC has recognized, three events — the regulatory "trilogy — form the cor- 
nerstone of future telecommunications policy: 

National Local Competition Rules. — ^Adoption of national rules is needed to foster 
local competition throughout the U.S. 

Universal Service Reform. — A competitively-neutral universal service plan that in- 
creases the number of Americans on the network, that provides affordable local 
service as well as access to basic and advanced services, that ensures that all car- 
riers contribute on an equitable basis and that eliminates a system of hidden sub- 
sidies that are as outmoded as the rotary dial phone is necessary to achieve high 
levels of usage while denying monopolies corporate "welfare" payments. 

Access Charge Reform. — Cost-based access prices are necessary to achieve the pol- 
icy of bringing competition to all telecommunications sectors. 

Like any literary trilogy, each part must not only stand on its owti strength, but 
must also be viewed relative to the whole to be fully understood. 

The FCC's national local competition rules 

On August 1, the FCC completed its work on part one of this poUcy trilogy — its 
local competition rules. It passed those rules on to the state commissions for imple- 
mentation as part of the negotiation and arbitration procedures to open local mar- 
kets to new entrants. From MCI's perspective, the steps thus far, while not perfect, 
have been largely positive and pro-competitive: 

National Rules. — While MCI will have to engage in state-by-state entry negotia- 
tions and arbitrations, we now have firm ground beneath our feet in the form of 
national rules that define a baseline of local competition requirements. States retain 
flexibility to add to the basic rules that the FCC outlined. 

Adoption of an Economic Cost Methodology. — A forward-looking economic cost 
methodology is the hallmark of a competitive market and this is what the FCC se- 
lected. Such a model provides incumbent telephone companies with a reasonable 
profit and enables them to recover a share of joint and common costs. 

Default Prices. — Even those states that lack resources to evaluate cost studies 
right away may jump start local competition. States remain in the "driver's seat" 
and can select their own prices consistent with the FCC's cost methodology. 

The FCC still faces considerable challenges in completing the next two parts of 
the trilogy. In a competitive marketplace, there is no place for guaranteed profits 
and unneeded subsidies. Competition in both the local and long distance markets 
will be adversely affected if competitors are forced to pay incumbent monopolies out- 
rageously inflated access charges that are seven times above the cost. Achieving 
competitively-neutral universal service reform and reducing access charges to cost 
are two necessary steps in truly moving forward the pro-competition agenda. 

The need for universal service reform 

Local competition rules will be effective only to the extent that the current system 
of local telephone subsidies is made rational, explicit, and available to all competi- 
tors. 

FCC adoption of competitively-neutral rules to promote competition. — Current uni- 
versal service subsidies, which are based on the local telephone company's historical 
costs, would protect it from the market discipline on its prices that competition 
should provide. As long as the universal service funding mechanism involves sub- 
sidies that are internal to the incumbent monopoly, potential competitive providers 



53 

of local service — even if more efficient — would find it difficult to compete with the 
incumbent. 

All carriers must pay into the fund. — Universal service contributions should be 
made on an equitable basis by all providers of telecommunications services, based 
on their relative revenue shares, net of payments to other carriers. Recovering uni- 
versal service support from all carriers would eliminate current incentives for car- 
riers to avoid those services that pay for the universal service programs. 

Ensure affordability of local service. — A competitive market will, over time, drive 
down today's above-cost price of local telephone service to economic cost. Today, the 
cost of serving low income consiimers and customers in high cost areas likely ex- 
ceeds rates that those customers are willing to pay or rates that regulators find ac- 
ceptable. The universal service fiind subsidies must bridge the "affordability gap" 
until competition drives prices sufficiently low. In addition, rates set at economic 
cost may be unaffordable for low-income consumers. 

The need for access charge reform 

As the FCC has recognized in other contexts,^ the RBOCs have the ability and 
the incentive to squeeze their competitors by overcharging them for key inputs (i.e., 
access to the local networks to reach customers) that competitors need to originate 
and terminate calls. Given the size of the revenue generated from access charges — 
long distance company pajrments exceeded $23 billion in 1995 — the RBOCs' incen- 
tives to act anticompetitively are significant and undeniable. MCI has filed studies 
with the FCC demonstrating that access charges today are approximately seven 
times their economic cost. The total interstate switched access charge is now about 
three cents per minute for the use of RBOC facilities which, according to Hatfield 
Associates, cost less than four-tenths of a cent per minute to provide. 

Local access is the most lucrative line of business for the RBOCs, with margins 
about three and one-half times more than the long distance industry, helping to 
make the RBOCs among the wealthiest corporations in the world. They have the 
highest operating cash flow margins of any U.S. industry — greater than oil compa- 
nies, electric utilities, and drug companies, and much greater than the long distance 
industry. Two companies with second quarter revenues similar to MCI's, GTE and 
BellSouth, are twice as profitable as MCI. The other RBOCs' margins are similar. 
Why? Because they operate in sheltered monopoly markets. They are rich enough 
to invest heavily in foreign telephone markets — and to offer premiums to acquire 
each other. 

If the RBOCs were allowed to enter the long distance market before the access 
charge regime is reformed, the current outrageously high level of access charges 
would give them a tremendous — and tremendously unfair — advantage. Competitors 
can't be saddled with inflated access charges that subsidize the RBOCs' entry into 
long distance if real competition is to be created in local markets and retained in 
long distance. Even if an RBOC is required by law to "impute" the above-cost access 
payments (as the Act requires of an RBOC long distance affiliate), all the RBOC 
is doing is moving the money from its long distance side of the business to the ac- 
cess side of its business. The long distance business, to the extent it continues to 
rely on over-priced RBOC-provided access, would be imperiled. The only pro-com- 
petition solution requires that access charges be reduced to cost immediately. MCI 
would much rather give that money to our customers through lower rates than hand 
it over to the RBOCs. In fact, MCI has publicly committed to flow access reductions 
through to our customers and your constituents. 

THE PROPOSED RBOC MERGERS WILL HARM COMPETITION 

The recent announcements of two pending RBOC mergers are alarming and ought 
to be opposed. By choosing the route of consolidation rather than competition, SBC 
and PacTel, and Bell Atlantic and NYNEX provide further compelling evidence of 
their ambition to thwart the development of competition in their local monopoly 
markets. It is not coincidental that these mergers were announced only two months 
after passage of the Act. The new law significantly increased the vulnerability of 
each RBOC to competition in its core local markets and permitted each to offer out- 
of-region long distance services. That vulnerabiUty and that opportunity created a 
clear and present danger that the RBOCs would actually compete with each other 
in local markets. Rather than compete in each other's markets, four RBOCs have 
announced their plans to consolidate and head off competition. 



•^ Local Exchange Carriers' Rates, Terms, and Conditions for Expanded Interconnection 
Through Virtual Collocation for Special Access and Switched Transport, Report and Order, CC 
Docket No. 94-97, Phase I, 10 FCC Red 6403 (1995). 



54 

The mergers, if approved, will frustrate local competition. Indeed, the RBOCs spe- 
cifically defend the proposed mergers principally on the ground that they will not 
reduce current levels of actual competition.'' The mergers do nothing more than in- 
crease the number of local monopoly markets controlled by any single entity and, 
they argue, are therefore entirely inoffensive. This view rests on a fundamental mis- 
conception of the antitrust laws. Antitrust law is concerned not primarily with the 
status of competition now but, rather, with the outlook for competition in the future. 
The proper question is not whether the proposed mergers will make the markets 
less competitive (they couldn't possibly be), but whether they will stand in the way 
of making those markets more competitive. 

The mergers should be blocked under section 7 of the Clayton Act 

Antitrust law demands a dynamic, not static, analysis to answer such questions. 
A forward-looking analysis is especially crucial here because we are at the dawn of 
a new telecommunications era. There is no stable historical baseline against which 
to measure the likely competitive consequences of the proposed mergers. The rel- 
evant markets are characterized by rapid technological change, the dismantling of 
regulatory barriers to competition, and the imposition of federal policies specifically 
designed to open these markets to competition. Section 7 of the Clayton Act pro- 
hibits mergers when there is a reasonable probability that there would be less com- 
petition in a given market after a proposed merger than there would be absent the 
merger. In MCI's view, this is not a close call. It is extremely likely that local mar- 
kets in SBC's, PacTel's, Bell Atlantic's, and NYNEX's regions will see markedly less 
competition in the foreseeable future if the mergers are consummated than if they 
are blocked. It is our hope and expectation that DOJ will advance the cause of com- 
petition, consistent with antitrust law, the 1996 Act and the interests of consumers 
nationwide, by moving to block these proposed consolidations. 

Numerous factors, alone and collectively, will make realization of the Act's prom- 
ise, particularly the development of local competition, substantially more difficult if 
the RBOCs are permitted to merge with each other. Briefly stated, the mergers 
would have several anti-competitive consequences in telecommunications markets, 
including (but not limited to): 

Eliminate Key Potential Local Competitors. — Because the merging RBOCs would 
be very likely to enter each other's markets absent the proposed mergers, allowing 
the mergers will eliminate especially advantaged competitors. 

Diminish Opportunities for Non-RBOC Entry. — By eliminating or reducing the 
prospects for competitive entry into one RBOCs territory by other RBOCs, the 
mergers also reduce the prospects for successful entry by non-RBOCs that would 
otherwise benefit from the pathbreaking efforts of the out-of-region RBOCs. 

Enhance Opportunity for Anticompetitive RBOC Coordination and Collusion. — ^The 
mergers enhance the ability and incentive for the remaining RBOCs to collude in 
a strategy of mutual nonaggression, thereby entrenching existing anti-competitive 
market allocation. 

Increase Likelihood of RBOC Anticompetitive Harm in Local and Long Distance 
Markets. — By capturing a significantly larger share of the access market in the com- 
bined regions, two "mega-RBOCs" — possessing bottleneck control of over 45 percent 
of the nation's phone lines — would substantially shrink the remaining market avail- 
able to potential entrants. In addition, by increasing the number of long distance 
calls that originate and terminate entirely in-region, the mergers would enhance the 
"mega-RBOCs"' access charge advantage as well as their ability to effect nonprice 
discrimination against their long distance rivals, thereby strengthening their posi- 
tions in the long distance market and, as a consequence, raising the barriers to suc- 
cessful entry into their monopoly local markets. 

Elimination of key potential competitors 

The mergers substantially reduce potential local competition. But for the mergers, 
RBOCs would be particularly likely to enter each other's market. It is essentially 
indisputable that Bell Atlantic and NYNEX would enter each other's markets to 
compete head-to-head if they were prevented from merging. As Bell Atlantic Chair- 
man and CEO Raymond Smith noted noted in an announcement of the proposed 
Bell Atlantic acquisition of NYNEX, "[Olur two regions are really one big market, 



' See Joint Application of Pacific Telesis Group and SBC Communications Inc. To the Califor- 
nia Public Utilities Commission, April 26, 1996. 



55 

with all the major urban areas up and down the east coast and lots of communities 
of interest."** Wall Street and newspaper analysts concurred.^ 

Similarly, SBC's foreign interests and aspirations provide substantial evidence 
that SBC was a likely entrant into PacTel's region. SBC's intentions of being a sig- 
nificant carrier of international traffic between the U.S. and Latin America and Asia 
cannot be achieved without a strong presence in California. Even more significant 
is SBC's ownership and control of Telmex, the Mexican telephone monopoly, that 
is frustrating efforts of new entrants to compete in Mexico. Because approximately 
50 percent of U.S. -Mexico traffic originates and terminates in the combined SBC- 
PacTel regions, SBC's control over local markets in both regions would enable it to 
foreclose a substantially greater share of the U.S.-Mexico market that it could at 
present. An SBC-PacTel merger would solidify Telmex's power against its rivals to 
the detriment of U.S., consumers who call Mexico. SBC and PacTel acknowledge 
this in their application to the California PUC for approval, describing the Califor- 
nia, Texas, Mexico region as a natural community of interest. In order to secure its 
control over this community, SBC would be compelled to challenge PacTel in Cali- 
fornia if it could not achieve the same result through merger. 

The ehmination of an RBOC as a competitor is significant given that they posses 
unique advantages. In particular, the RBOCs have large advantages in trained per- 
sonnel, access to and knowledge of operational support systems, favorable treatment 
as large customers of vendors of switches and other telecommunications equipment, 
an existing relationships with large corporate customers. In addition to operational, 
architectural an experiential factors, the RBOCs enjoy substantial financial advan- 
tages over other potential local competitors. As noted earlier, the RBOCs are among 
the wealthiest corporations in the world and have the highest cash flow margins of 
any U.S. industry. 

The RBOCs are not the only firms potentially capable of bringing competition to 
local monopoly markets, but they do posses unique resources that, if brought to bear 
out-of-region, would have a powerful effect on the development of local competition. 
Consumers in all four of these RBOC regions will feel the loss of potential entry 
that these mergers entail. These mergers will impede the development of competi- 
tion in those local markets; prohibiting them will accelerate it. Under Section 7 of 
the Clayton Act, the choice is clear. 

Mergers diminish opportunity for non-RBOC local entry 

Insofar as the mergers eliminate one potential entrant from each of these four 
RBOCs' local markets and increase the likelihood that other RBOCs will forebear 
from entering those local markets, they also hamper entry by non-RBOCs by extin- 
guishing a crucial source of pro-competitive pressure in each of these markets upon 
which those other potential competitors must rely. This is true for several reasons. 
First, an RBOCs inside knowledge of local network capabilities and limits gives it 
an unusual ability to achieve pro-competitive state regulatoiy action. Entrants to a 
local market are better able to rebut the potentially obstructionist arguments of the 
incumbent RBOC before a state PUC if the entrants' rank include another RBOC. 

Second, an entering RBOC can be more effective in negotiations with the incum- 
bent RBOC than other entrants because it knows that what technical capabilities 
the incumbent possesses. This will benefit all new entrants because, under section 
252(i) of the Act, all entrants can avail themselves of the terms and conditions of 
an agreement made between the incumbent and any one the them. All entrants suf- 
fer when the strongest of potential entrants chooses not to enter. Thus, the reduc- 
tion of RBOC competitors also dampens the competitive prospects for non-RBOCs. 

Mergers enhance opportunity for anticompetitive RBOC coordination and collusion 
The proposed mergers enhance the ability and the incentive for the remaining 
RBOCs to forbear from entering each other's markets, thereby entrenching and for- 
malizing a territorial market allocation that exists as a result of the antitrust con- 



8 Raymond W. Smith, Merger Announcement, Employee Video Conference (Bell Atlantic Media 
Relations Home Page) 

3 Analysts predicted that "each company's core business would be less susceptible to competi- 
tive entry because both Bell Atlantic and NYNEX would have likely been aggressive in attach- 
ing each others service territories given the geogrpahic proximity." Dean Witter, Bell Atlantic 
to Merge with NYNEX, April 22, 1996 (Guy W. Woodlief); see also Salomon Brother, Bell Atlan- 
tic/NYNEX Merger Creates Opportunity, April 22, 1996 (Jack B. Grubman). Press reports were 
similar: The April 22 Wall Street Journal reported that "Bell Atlantic and NYNEX * * * serve 
adjacent regions and could have turned into each other's worst competitive nightmare. By com- 
bining each eliminates a hearty rival * * *." The New York Times, of the same date, observed 
that "[A]s NYNEX gazes across the Hudson at the most aggressive Bell company in the country, 
merging now probable seems a lot more appealing than the prospect of fighting later." 



56 

sent decree that broke up the Bell System in 1984. Since divestiture, the RBOCs 
have carefully avoided competing in one another's core local exchange businesses. 
The 1996 Telecommunications Act has, however, eliminated those legal and regu- 
latory barriers that may have dissuaded the RBOCs from competing against each 
other in the past. There should be a strong presumption here against extending the 
anticompetitive effects of this territorial allocation by, in effect, making those alloca- 
tions permanent through mergers. 

More generally, successful RBOC mutual non-aggression and forbearance from 
entry into one another's markets is much more likely with fewer competitors be- 
cause coordination is easier.'*' The consequences of retaliation are more severe as 
the number of RBOCs decreases. Each has more to lose and an increased incentive 
to maintain the status quo. Additional RBOC consolidation, which these mergers 
will likely stimulate, further increases the prospects of coordinated territorial alloca- 
tion. 

Indeed, recent testimony by Bell Atlantic's own experts confirms this point. Alfred 
Kahn and William Taylor endorsed Bell Atlantic's proposed merger with TCI largely 
on the ground that the resulting entity's plan to bring facilities-based competition 
to other RBOCs would provoke the "mutual interpenetration of previously exclusive 
market territories" that appeared to be the most promising road to true competi- 
tion. '^ The TCI merger was not consummated and three years later — within two 
months of the Act's enactment — Bell Atlantic proposes to merge with another 
RBOC, the most likely and formidable rival in its local markets, instead of compet- 
ing head-to-head as it had earlier proposed. 

Mergers increase likelihood of anticompetitive harm in local and long distance mar- 
kets 

The entry, upon authorization, of the "mega-RBOCs" into long distance vrill sig- 
nificantly inhibit the development of competition in the local market by shrinking 
the amount of access charges potentially available to other would-be entrants. The 
merged RBOCs will rely entirely on themselves to provide access to their long dis- 
tance services within the merged region. Hence the shift of an important share of 
long distance traffic from independent long distance carriers to the RBOCs will re- 
duce the potential business available to an independent local carrier. Because access 
revenues are such an important part of the local market — more than $23 billion in 
1995 — the reduced size of the local access market will substantially limit the incen- 
tive perceived by the potential entrant to the local market, thereby reducing both 
the number of and viability of local competitors. For example, if SBC does not merge 
with PacTel, then when SBC seeks to provide long distance service terminating in 
PacTel's region, it will shop for the most advantageous access pricing for terminat- 
ing traffic. New local entrants that provide access would vigorously compete for 
SBC's business. The merger would remove SBC as a customer for those new com- 
petitors in PacTel's local market, making entry considerably more difficult. 

The mergers solidify the proposed "mega-RBOCs"' power in the local markets by 
enhancing the strength they would exercise in the long distance markets if and 
when they are authorized to provide interLATA service. Because of its monopoly 
control over the bottleneck local loop, such an RBOC wdll have strong incentives to 
engage in non-price discrimination against its long distance rivals. The harm result- 
ing from non-price discrimination against MCI and other long distance competitors 
were a principal justification for divestiture. '^ 

RBOCs can discriminate in a number of ways; consider a few examples. An RBOC 
can refuse or delay interconnection on the basis of unsupported claims of technical 
infeasibility. Or an RBOC can provide degraded connections to competitors and se- 
lectively provide superior services to their own affiliates. An RBOC can 
discriminatorily use sensitive information MCI and others must provide when estab- 
lishing new access arrangements. An RBOC can also refuse to develop access modi- 
fications we need, or delay such modifications to give its affiliate time to "catch up." 
One last example: an RBOC can make available services to its affiliate before re- 
leasing similar services to long distance competitors. In a variety of ways that are 
both highly effective and difficult for regulators to detect and police, the RBOCs can 



'"See, e.g., Hospital Corp. of America v. FTC, 807 F.2d 1381, 1387 (7th Cir. 1986) (Posner, 
J.), cert, denied, 481 U.S. 1038 (1987). 

»'Kahn & Taylor AfTidavit, at para. 22. 

»2See United States v. Western Electric Co.. 900 F.2d 283,301 (D.C. Cir. 1990) ("BOC entry 
into the interexchange market * * * would of course provide an incentive to deny equal access 
and to cross-subsidize if possible"). See also Motion to Vacate, Affidavit of Jeffrey M. Perloff and 
Larry Karp (submitted in support of motion to vacate), "fl 111 ("The major potential advantage 
that the flBOCs have in the long-distance market is through restricting access to other long- 
distance carriers.") 



57 

and will withhold the cooperation necessary to permit long distance competition to 
continue to flourish. 

As discussed earlier, the RBOCs can engage in price discrimination against their 
long distance rivals as a result of the grossly inflated access charges. Both price and 
nonprice advantages are magnified on all long distance calls for which the RBOC 
controls the local bottleneck at not just one, but both, ends. The effect on the access 
charge advantage is straightforward: it doubles. The only pro-competition solution 
requires the reduction of access charges to cost. 

MCI estimates indicate that the SBC-PacTel merger would increase the percent- 
age of long distance calls that are wholly intra-region for those two carriers by ap- 
proximately 20 percent. The proposed Bell Atlantic-NYNEX merger would produce 
even greater increases in intra-region traffic. The number of long distance calls orig- 
inating and termination in Bell Atlantic's region would increase by nearly one-third 
and NYNEX would have about a 50 percent increase. 

The mergers' effects on intra-region long distance are significant because the like- 
lihood that any given customer will purchase its long distance service from its local 
RBOC increases in proportion to the percentage of that customer's long distance 
calls on which the RBOC can engage in price and nonprice discrimination at both 
ends. The mergers present a distinct threat to competition in the long distance mar- 
kets in the Bell Atlantic, NYNEX, SBC, and PacTel regions. 

The danger to local competition is even more acute because many customers will 
prefer to purchase their local and long distance services from a single carrier. Any 
mechanism that enhances the attractiveness of an RBOCs long distance service — 
whether or not that mechanism is anti-competitive — will make it harder for new en- 
trants to woo the RBOCs customers away for the provision of local service. Insofar 
as customers value "one-stop shopping," every long distance customer that an RBOC 
captures raises the barrier to entry into the RBOCs local markets. Because those 
markets are already monopolies, a merger that increases an RBOCs ability to gain 
long distance customers is necessarily anti-competitive. 

Each of the factors discussed above will make it more difficult for local competi- 
tion to develop. Some will have a more substantial effiect than others. Collectively, 
all these factors ensure that the mergers would have a profoundly negative effect 
on the development of local competitive and risk significant harm to the already 
competitive long distance market. 

CRITICAL ROLE OF DOJ IN PROMOTING COMPETITION 

Mr. Chairman, the FCCs completion of the local competition regulatory "trilogy" 
and thorough DOJ scrutiny of pending RBOC mergers are critical to achieving the 
Act's goal of fully competitive telecommunications markets. The Act specifically rec- 
ognized the appropriateness of DOJ's review of such mergers. 

Equally important is DOJ's careful review of RBOC applications to enter the in- 
region long distance market under Section 27 1 of the Act. Premature RBOC entry 
would not only harm an already competitive long distance market, but would also 
impede the development of local competition. The RBOCs control of access to vir- 
tually every business and residential customer in their regions could be leveraged 
anticompetitively in both markets. 

Before authorizing RBOC entry into the long distance market, the FCC, in con- 
sultation with DOJ, must establish that the petitioning RBOC has met the Section 
271 competitive "checklist" of market-opening requirements and that the RBOC 
faces facilities-based competition for local services to both business and residential 
customers. In making its evaluation. Section 271 specifically states that DOJ may 
use any standard it considers appropriate and DOJ's evaluation must be accorded 
substantial weight by the FCC. As the guardian of our nation's competition policies, 
DOJ has the expertise and experience necessary to protect consumers and competi- 
tors from the anticompetitive conduct of the RBOC monopolies. MCI again acknowl- 
edges the leadership of many members of this Committee for ensuring that the Act 
includes an appropriately important role for DOJ. 

CONCLUSION 

Mr. Chairman and members of the Committee, the Telecommunications Act of 
1996 provides an historic framework that may unleash virtually unlimited opportu- 
nities for companies to provide new services in environment replete with customer 
choice both in features and price. The details of how the framework is implemented, 
however, are critical. The result vdll either pave the road to competition or will pro- 
vide an impenetrable roadblock. The FCC must complete the regulatory trilogy and 
the DOJ must stand guard against anticompetitive proposed activities. 



58 

Last month, the FCC made a good start when it issued the local competitive rules. 
Early next year, it will complete the trilogy by issuing regulations implementing 
needed reforms on universal service and on access charges. The Act calls for a com- 
petitively neutral universal service mechanism. The subsidies that all competitors 
will pay to this fund must be equitable and expUcit and must be coupled and reform 
of the existing access charge system which presently requires some potential com- 
petitors to pay charges that are seven times above the RBOC's actual cost. Both of 
these rulemakings are critical to ensure that no one player in the marketplace — es- 
pecially an incumbent monopoly — is at a significant, unfair advantage to its rivals. 

Of equal importance, the DOJ must continue to play its traditional role as the 
guardian against anticompetitive economic activities in this country. The members 
of this Committee are to be commended for insisting that the final legislation in- 
cluded an important and appropriate role for the DOJ in reviewing RBOC entry ap- 
plications. Together with the DOJ's long-standing antitrust role, this is critical to 
ensuring that competition in the telecommunication field will flourish. Proposed mo- 
nopoly mergers, such as those envisioned by Bell Atlantic and NYNEX and SBC and 
PacTel are the antithesis of competitive that the legislation envisioned. The Act did 
not envision the growth and consolidation of existing monopolies, but rather the 
opening of monopoly markets. 

Mr. Chairman, I appreciate having the opportunity to testify today. I applaud the 
Committee for its attention to and oversight of these important competition issues. 

Senator Thurmond. Mr. Barr. 

STATEMENT OF WILLIAM P. BARR 

Mr. Barr. Thank you, Mr. Chairman. I am privileged to appear 
here today before the committee. As you know, I represent GTE 
Corp., and in a way we don't have a dog in this fight because we 
are not involved in a merger. We are a local exchange company. We 
are not part of the Bell group. We operate in 28 States, and after 
the legislation has passed we have now started offering long dis- 
tance. We are in 20 States offering long distance, adding 6,000 cus- 
tomers a day to that line of business. 

In addition, we have filed to compete against other LECs. In 
Texas, we have filed to compete against Southwestern Bell. In Cali- 
fornia, we have filed to compete against PacTel, and we have filed 
to compete in Virginia and Pennsylvania against Bell Atlantic. So 
from a narrow business perspective, it is not in GTE's interest to 
see these two mergers occur, to the extent that they create more 
formidable competitors for us. But we are not here to plead a spe- 
cial case and try to derail potential competitors. What we are try- 
ing to do is help this committee's assessment of the antitrust impli- 
cations of these mergers. 

I see no basis for concern from an antitrust standpoint. Clearly, 
as far as the local exchange is concerned, the proper analysis is for 
potential competitors, and I have heard the four companies in- 
volved saying they did not have plans and I take them at face 
value, and certainly the Justice Department will review the docu- 
mentation. But even that is not the critical issue. The critical issue 
is whether or not they are singularly suited and uniquely qualified 
to be the principal competition of each other, and that clearly is not 
met. 

The test really is, does the prospect of developing competition up 
in NYNEX's market rest really on the shoulders of Bell Atlantic, 
and to suggest that it does is simply nonsense. It has no bearing 
in the real world. There are numerous existing entrants already 
and there are numerous potential entrants that pose a far greater 
competition threat to NYNEX and Bell Atlantic than those two 
companies do, and the same with respect to SBC. 



59 

As far as the interLATA market is concerned, the argument real- 
ly is another dusted-off version of the antiquated bottleneck argu- 
ment that somehow they will unfairly leverage their position in the 
local market to gain advantage in interLATA. Let me just say that 
now that we have equal access in effect, now that we do have 
emerging competition, and now, on top of those things, that we 
have a 14-point checklist that the RBOC's have to meet before they 
are allowed into long distance, that argument of the bottleneck 
really evaporates. We are not talking about a bottleneck anymore. 

Let me just say that there has been some skepticism about 
whether or not there is actual competition in the local market, and 
I would like to use Senator Leahy's example because I think it real- 
ly offers a very good illustration. 

The fact is, Senator, here on Capitol Hill you do have a choice 
of what phone to use. I was very amused that Mr. Ebbers was sit- 
ting here acting as if there was no local competition. This is a very 
profitable center here, Capitol Hill. You can imagine all the calls 
that are made from here. Well, the fact is Bell Atlantic doesn't 
serve it. It was taken away by MFS. It is being served by a CAP. 
That is where the margin is, that is where the competition is. 

Now, up in Vermont, I don't know for a fact, but I would bet that 
you are being subsidized, that the money you pay every month for 
local phone service is not covering the cost. The person who is pick- 
ing up the difference is a business in Vermont, such as Ben and 
Jerry's, and I bet you right now Ben and Jerry's has a choice and 
I bet you there are CAP's and they are trying to get Ben and Jer- 
ry's business. No one is interested in your business. Senator, be- 
cause you are not paying costs. 

Senator Leahy. Both Ben and Jerry can afford it a lot better 
than I can. [Laughter.] 

Mr. Barr. ok. Let me just say that I think the overall point 
shouldn't be lost. I think we are in a time warp, and my overarch- 
ing concern about how you are looking at telecom deals is don't get 
locked in the mindframe of 1984 and the theoretical problems that 
were identified then. Look at what is happening today, and, I 
think, when you see what the FCC order, it is a radical overturning 
of what Congress tried to do in the Telecommunications Act. 

What it does is it says that — where Congress said that when peo- 
ple come in and try to set up competition and set up facilities and 
they want to piece together a network, they have to pay the cost 
to the incumbent facility-based LEC, the FCC has come along and 
said, no, you are able to pay a very deep discount, more than 40 
percent, for their facilities. This really converts the local exchange 
company into a wholesale platform, and when you look at who is 
going to be powerful in the game of packaging services that are es- 
sentially bought from a wholesale provider and labeling them, it is 
the companies with the brand names and the customers, and those 
companies are the EXE's principally right now. 

With that, I will stop my prepared remarks. 

[The prepared statement of Mr. Barr follows:] 

Prepared Statement of William P. Barr 

I appreciate the opportunity to offer my views on the important topic before this 
Committee today, and I thank Chairman Hatch and the other members of the Com- 
mittee for inviting me to appear. 



60 

Let me begin by noting that GTE currently provides wireline local exchange serv- 
ice in 28 States and wireless service in 16 States. The States that GTE serves in- 
cludes States that will be part of the combined Bell Atlantic-NYNEX region, States 
that will be part of the combined SBC-Pacific region, and local service areas in 
which LDDS Worldcom-MFS is or will be competing. Presumably, these mergers are 
being undertaken because the merging parties believe that they will gamer effi- 
ciencies from merging. To the extent that the mergers make them more effective 
competitors, it is not in GTE's interest to welcome any of these three mergers. The 
question being addressed by this Committee, though, is whether any of these merg- 
ers presents serious antitrust concerns, and, as the general observations that I will 
outline indicate, I believe that it is clear that they do not present any such concerns. 

I have four general — and interrelated — observations that I believe ought to inform 
antitrust analysis in the telecommunications industry today: 

1. In many places, and especially in key markets, the so-called local bottleneck, 
on which so much of antitrust regulation of local exchange carriers was premised, 
has been opened up wide. In enacting the landmark Telecommunications Act of 
1996, Congress recognized what the marketplace has showm: the local exchange 
market is, in many places, no longer characterized by the economics of natural mo- 
nopoly. In other words, competing local carriers can profitably enter the market and 
provide services to the consumer. Therefore, the traditional antitrust concern that 
a local exchange carrier might leverage its power in the local exchange market into 
other product markets has been dramatically lessened. 

2. In addition to actual new entrants in the local marketplace, there is a legion 
of powerful potential new entrants, including those entities currently operating as 
interexchange carriers, competitive access providers, and wireless providers. In 
short, an incumbent LEG serving an attractive service area faces a broad array of 
competitive threats. While an adjacent LEG — that is, a LEG serving an adjacent 
service area — may also be a potential entrant, there is no reason to believe that 
such a LEG has any significant overall advantage over other entrants, and there 
is therefore no reason to believe that the competitive threat from that adjacent 
leg's actual or potential entry will significantly affect the development of competi- 
tion. 

3. Local exchange carriers are subject to pervasive regulation by both the FGG 
and state public utilities commissions. Such regulation is more than adequate to 
prevent and detect any anticompetitive abuses by local exchange carriers. Indeed, 
the real danger to competition is that excessive, onerous regulation will prevent in- 
cumbent local exchange carriers from competing on a level playing field with the 
new entrants. The Federal Communications Commission's recent rules purporting 
to implement the Telecommunications Act of 1996 highlight this danger. Contrary 
to the pro-comeptitive, deregulatory intent of Congress in enacting the Act, the 668 
pages and 3,276 footnotes of the FCC's First Report and Order require incumbent 
LECs to subsidize their competitors through below-cost pricing and force incumbent 
LECs to operate their networks for the benefit of competitors. Under the FCC's sys- 
tem, it make no sense for any competitor to develop its own network. Instead of real 
competition that spurs investment, creates jobs, and improves services, the end re- 
sult of the FCC's rules will be a scheme of contrived "Potemkin competition" in 
which so-called competitors merely rebrand services purchased below-cost from a se- 
verely handicapped incumbent LEG and create the false appearance of competition. 

4. Recent academic research strongly indicates that the long-distance market is 
ciurently characterized by oligopolistic pricing by the three leading interexchange 
carriers (AT&T, MCI, and Sprint). To the extent that any merger increases the pros- 
pect for vigorous competition in the long-distance market in the long run, it ought 
to be viewed very favorably by antitrust authorities. 

What all of these observations together suggest is that the proper role of antitrust 
with respect to mergers and acquisitions of local exchange carriers will be a limited 
one. Such transactions will not typically present any serious antitrust concerns, and 
one ought especially to be highly skeptical when such concerns are voiced by power- 
ful industry competitors. 

Senator Thurmond. We will be glad to hear from you, Mr. Atkin- 
son. 

STATEMENT OF ROBERT C. ATKINSON 

Mr. Atkinson. Thank you, Senator Thurmond and Senator 
Leahy. Teleport Communications Group [TCG] is pleased to testify 



61 

today on the impact of mergers of Bell operating companies on local 
exchange competition. 

As background, TCG is the Nation's leading competitive local ex- 
change carrier, or CLEC. We operate in California in competition 
with Pacific Telesis, in Texas and Missouri in competition with 
Southwestern Bell, and in most of the States in the NYNEX and 
Bell Atlantic regions. From 10 years of experience, we draw the fol- 
lowing conclusions about these mergers. 

The BOC mergers, we believe, will cause chaos, confusion, and 
distraction within the resulting Big Bell, leading to substantially 
worse operational performance by that Big Bell. In particular, serv- 
ice intervals, quality and reliability are likely to deteriorate sub- 
stantially, at least for a number of years. This will be terrible for 
all consumers. 

Ironically, because BOC's will continue to control unique essen- 
tial services and facilities for the foreseeable future, CLEC's are be- 
coming more dependent on the performance of the BOC as they 
grow and expand. Consumers hold CLEC's accountable when a 
BOC service or facility used by the CLEC fails. Consequently, a 
substantial deterioration of a Big Bell's operational performance 
will increase a CLEC's costs, hurt its reputation, and impair the 
CLEC's ability to compete effectively and to provide consumers 
with an alternative to the Big Bell's poor retail services. 

The Telecommunications Act requires a BOC to provide competi- 
tors with performance quality no worse than it provides to itself, 
but this is not a competitive safeguard if the BOC's quality is dete- 
riorating. Moreover, traditional regulatory processes have proven to 
be very inadequate for encouraging BOC's to provide high-quality 
services to competitors. 

CLEC's and consumers should not be dragged down if the Big 
Bell's performance goes down. Therefore, as a minimum, BOC 
mergers should be conditioned on the Big Bell maintaining oper- 
ational performance for CLEC interconnections at levels no worse 
than today's mediocre performance. Of course, a condition requiring 
steadily improving BOC performance in providing interconnections 
would promote better service to consumers and more effective com- 
petition. 

BOC's must be subject to swift, certain and substantial penalties 
for imposing poor performance on their competitors. A BOC that 
does not expect its service to deteriorate as a result of the merger 
should not object to a condition requiring only the status quo. But 
opposition to such a condition implies that the Big Bell expects its 
performance to deteriorate or that it intends to use its control of 
essential monopoly network elements to competitively disadvantage 
CLEC's. Alleged consumer benefits of BOC mergers cannot occur so 
long as CLEC's are subject to anticompetitive behavior on the part 
of the Big Bell. The existing monopoly will simply become further 
entrenched if a Big Bell is permitted to control its competitor's 
service quality and costs. 

Thank you for allowing me to make these brief remarks and I 
look forward to responding to your questions. 

[The prepared statement of Mr. Atkinson follows:] 



An i:nr\ m 



62 

Prepared Statement of Robert C. Atkinson 

Good morning Chairman Hatch and members of the committee. TCG is pleased 
to testify today on the key subject of mergers and competition. I am Bob Atkinson, 
TCG's Senior Vice President for Legal, Regulatory and External Affairs. TCG is the 
nation's leading competitive local exchange carrier, serving 51 major markets with 
state-of-the art fiber optic backbone networks supplemented by wireless facilities. 
We provide local exchange access services to long distance carriers, intra-LATA toll 
service, and switched local exchange services. We do business in California in com- 
petition with Pacific Telesis, in Texas and Missouri in competition with Southwest- 
ern Bell, and in most of the states in NYNEX and Bell Atlantic's regions. 

My message is very simple. Mergers are desirable if consumer benefits result. 
Mergers of two giant telecommunications companies each having 99% of their mar- 
ket are not likely to benefit consumers so long as the relevant markets remain mo- 
nopolized. 

TCG is a company that has begun to "demonopolize" the markets of every Bell 
Operating Company (BOO. TCG can do this quickly if the BOCs — and especially 
any merged BOCs — are compelled to treat TCG in a pro-competitive manner, all the 
time, forever. The way to assure this was explicitly recognized in the Telecommuni- 
cations Act of 1996: The incumbent local exchange carriers, who must now inter- 
connect with their competitors, must treat their competitors at least as well as they 
treat themselves. [Sec. 251(c)(2)(C)]^ TCG therefore believes that any BOC merger 
should be conditioned on the observance by the BOCs of explicit performance stand- 
ards in making their essential facilities available to competitors. The standards 
must have teeth in them, so that the BOCs will have the financial incentives to 
achieve them. 

The proposed mergers of Bell Atlantic with NYNEX and Pacific Telesis with SBC, 
like any mergers of huge corporations, initially are going to create chaos in those 
corporations. There can be no doubt that the BOCs will be distracted from their 
daily operations as they blend their disparate corporate cultures, operation support 
systems, billing systems, etc. Inevitably following a restructuring of such magnitude, 
employees will be focussed on internal concerns. In a truly competitive market, TCG 
might in fact be advantaged by the resulting chaos, to the extent that it will dimin- 
ish our rivals' ability to provide good local exchange and exchange access service to 
its customers. But, the local telecommunications markets are not fully competitive, 
and one consequence of chaos within the BOCs could be very damaging to TCG: It 
will make it even more difficult for the huge entity of the merged BOCs — I'll call 
them the "Big Bells" — to provide good service to TCG. 

I know this will be a problem post merger, because it is a problem now. TCG al- 
ready has had years of bad experience in interconnecting with BOCs, particularly 
NYNEX and SBC. They fail to turn up circuits on time, they fail to complete con- 
struction on time, they fail to deal with trouble reports on time.^ I believe that 
BOCs post merger, will be even less likely to make it easy for their competitors to 
obtain from them in a timely fashion the essential network facilities the competitors 
must have in order to compete with them. The potential harm to TCG caused by 
such failure is greater as TCG expands its switched business. 

Contrary to what you might expect, this expansion, which requires the inter- 
connection of more and more TCG facilities with BOC facilities, will for a transition 
period make all supposedly competitive local exchange carriers more, not less, de- 
pendent on BOC service quality. The technology and capabilities of incumbent LECs 
will become more, not less, critical to TCG. When a BOC fails to turn up a circuit, 
TCG customers blames TCG, not the BOC. The chain of telecommunications service 
in our world of interconnected networks is only as strong as its weakest link. TCG 
backs it reputation as the carrier with the highest possible service quality by mone- 
tary guarantees to our customers — if our service quality falls below the standard we 
promise, we don't charge the customer. If the BOC link in the chain fails, TCG suf- 
fers financially and our reputation can also be impaired. 

The BOCs' ability to raise their rivals' costs through delay and error is the great- 
est threat to full competition in the local exchange market. This may be intentional, 
or it may be accidental, but whatever the cause, the effect is anticompetitive. This 
ability is not constrained at all now. Although TCG has complained to both state 



• An incumbent LEG has the "duty to provide, for the facilities and equipment of any request- 
ing telecommunications carrier, interconnection that is at least equal in quality to that provided 
by the local exchange carrier to itself or to any subsidiary, affiliate, or any other party to which 
the carrier provides interconnection ♦ * *" 

2 For example. Between March 1996 and July 1996, despite assurances from NYNEX that per- 
formance would improve, it did not. Of the six performance measures that TCG monitors quar- 
terly, all but one were rated Unacceptable, compared to objectives set by TCG and NYNEX. 



63 

and federal regulators, the plain fact is that regulators, given the procedures they 
are legally required to follow, cannot fix TCG's problems quickly enough to mitigate 
all the harm that a BOC can cause TCG. Since Big Bells will have a much, much 
larger pie at stake,-^ after the proposed mergers, their incentive to continue dilatory 
behavior and foist inefTiciencies on their competitors can only increase. 

Interconnection agreements between BOCs and competitive local exchange car- 
riers may provide such safeguards, but the BOCs, once they have merged, and once 
they have achieved entry into the interLATA market, will lack any incentive to 
honor the agreements. SBC, Pacific Telesis, NYNEX and Bell Atlantic know from 
experience, that the traditional regulatory process is completely ineffective when it 
comes to compelling them to treat competitors fairly. Thus, it is clear that the BOC 
mergers must be subject to a reasonable safeguard outside the traditional regulatory 
process to prevent such anticompetitive conduct. 

The merging BOCs should enter into a Consent Decree providing for significant 
performance standards, together with meaningful penalties for their failure to meet 
the standards. The BOC must, by the intent of Congress, offer and interconnecting 
local exchange carrier service quality at least as good as what it offers itself As re- 
quired by the FCC ruling in Docket 96-98, standards assuring high quahty in inter- 
connection and interoperability must be referenced to the internal standards of the 
BOC. They must be subject to objective measurement. 

Because we believe that the disruptions of the mergers will cause the BOCs' own 
internal performance to deteriorate, it is not good enough to reference the internal 
standards of the Big Bell after the merger. Rather, at least the standard realized 
prior to the filing of the Hart-Scott-Rodino request should be provided to TCG. Then 
Big Bell's service to TCG can't get worse, post merger, if the internal reference 
standards of Big Bell get worse. When Big Bell's service quality improves above that 
pre-merger level, TCG and all other interconnecting local carriers should receive the 
same quality. 

If the BOCs claim, as they are now doing in the context of negotiations with TCG, 
that they have no such internal standards, then they have to develop them. The 
BOCs do have standards for service to their customers, and since the Act also re- 
quires that the quality of service offered CLECs must also be at least as good as 
what it offers any other carrier or any customer, they can adapt those to their inter- 
nal practices as well. 

But a standard is meaningless if failure to meet it results in a slap on the wrist. 
We have seen how ineffectual public utility commissions' fines for poor retail service 
have been: the BOCs pay the penalty, and make another promise, but service 
doesn't get any better. The same behavior cannot be allowed with respect to peer 
carrier service, for the result would be to curtail the opportunity for the peer car- 
riers like TCG to protect the public from monopoly abuse by developing alternative 
networks and service offerings. Thus, a BOC or a Big Bell must face a hefty penalty 
if it fails to meet its performance standard. The penalty amount should grow larger 
for each incidence of the same failure. A Big Bell should be subject to at least twice 
the penalty of either of the merging BOCs would have been subject to, to reflect the 
greater value to Big Bell of impairing rivals' service over a much larger territory. 

I have attached an illustrative list of minimum standards that TCG believes to 
be reasonable and appropriate. 

How could a company of good intention object to this proposal? If the Big Bell — 
or any BOC, for that matter — intends to live up to the requirements of the Tele- 
communications Act, it should have no difficulty in committing to strict performance 
standards. If the Big Bell intends to meet the standards, and intends to incent its 
employees so that they will treat competitors as well as they treat themselves or 
other customers, the Big Bell should be perfectly willing to enter into such a Con- 
sent Decree. And if a Big Bell opposes tough performance standards in a Consent 
Decree, doesn't that show the Big Bell's intent to use its control of essential monop- 
oly network elements to competitively disadvantage its peer local exchange carriers? 

Mr. Chairman, I have only one other suggested condition for any BOC mergers. 
As a threshold matter, all of the conditions required by the Act for BOC entry into 
the interLATA market should be satisfied before a merger is approved. The Section 
271 requirements speak the Congressional intent that BOCs not be allowed to ex- 
pand vertically until local markets are arguably open to competition. The BOC 
mergers are in essence vertical expansions from a geographical standpoint. 



3 To put the size of the proposed Big Bells into perspective, consider that Bell Atlantic and 
NYNEX will have, in local telecommunications alone, approximately 40 million access lines, rev- 
enues of nearly $24 billion — apparoximately 25% of the approximately $100 billion national rev- 
enues from local telecommunications — and EBITDA of over $11 billion. 



64 

In conclusion, TCG is entering new markets. We are adding switches at an im- 
pressive clip. We have signed interconnection agreements — pursuant to the Tele- 
communications Act of 1996 — with two of the BOCs that are subjects of proposed 
mergers: NYNEX in New York, and Pacific Telesis. (Notably, however, the merger 
partner of each of these BOCs has been totally unwilling to enter into a negotiated 
agreement.) By November 8 we will have a negotiated or arbitrated agreements 
with all of the BOCs. Thereafter, TCG will be able to plan ahead with better knowl- 
edge of its monetary costs for interconnection and for use of BOC or merged BOC 
network elements. But, TCG should not have to plan for the costs of substandard 
performance quality in providing those essential functions and capabilities. 

Thank you for the opportunity to present TCG's view. 

ATTACHMENT 1 .—INTERCONNECTION PERFORMANCE MONITORING 
(For illustrative purposes only) 
For each type of facility, Performance Standards should be set for: 
Installation 

Number of Installs 
Time taken for Install 
Percent on time 

Quality of Service 
Number of Failures 
Percent Availability 
Mean Time to Repair 

Grade of Service 
Bit Error Rate 
Blocking Rate 

ATTACHMENT 2.— SUMMARY OF NYNEX PERFORMANCE FOR TCG (JAN. 1994-MARCH, 1996) 

Three Examples of "Report Cards" maintained by TCG to measvu^ the perform- 
ance quality of the BOCs with whom TCG interconnects: 

Private Line Percent Availability — Declined; 

Private Line Failure Rate — Increased; 

Mean Time to Repair — Increased. 
In addition to the above, performance measures in TCG's mrrent report card are: 

Scheduled Dispatches for Repair; 

Pro-Active Status Updates wnen Outages Occur; 

Service Improvement Plan; 

Escalation Call Backs. 

Senator Thurmond. Thank you very much. We thank all of you 
for coming. 

Now, we will ask questions and each Senator will have 7 min- 
utes. 

Would each of you please give us your views on concerns raised 
about whether effective local competition will ever develop for busi- 
ness and residential customers, despite the best efforts of the Con- 
gress? 

Mr. Salsbury. Senator, I do believe that effective local competi- 
tion will develop, first, for businesses and then for residential cus- 
tomers. I think it took about 10 years in the long distance industry. 
It probably will take a similar time in the local industry, maybe 
shorter because of some technological innovations that are coming 
sJong, but I do believe it will enter. 

It is a fantastically lucrative market right now. If you compare 
the local market, which is around $100 billion in revenues and 
about a 50-percent profit margin, to the long distance market, 
which is smaller and about $75 or $80 billion and only has about 
a 15-percent profit margin, we look forward to entering it and we 
want to do it as quickly as we can. 



65 

Senator Thurmond. Mr. Barr. 

Mr. Barr. Mr. Chairman, prior to the enactment of the Telecom 
Act, the main inhibition, I think, were the built-in subsidies. There 
is competition for business traffic. There won't be substantial com- 
petition for residential traffic until there is rebalancing of rates. 
Congress' law, I think, did promise substantial competition, or ac- 
celerating competition across the board, but I think it has been 
sabotaged by the FCC. 

My concern is that what you will see develop in the local market 
is the incumbent LEC relegated to a wholesaler, unable to compete 
as a retailer because they have to provide every service, every effi- 
ciency they gain at a very substantial discount below cost. Then 
what will happen is the IXEs, who are essentially in a oligopolistic 
market at this point, can use their power to come in and replicate 
that in the local loop and this is how it will occur. 

We have to remember that AT&T, for example, has more cus- 
tomers than the RBOC's combined. This isn't like MCI trying to 
scratch its way into AT&T's business. These customers are sitting 
there inside each RBOC's territory, and my concern is that when 
they are able to have the brand name that they do, which is a leg- 
acy of the monopoly in the first place, and they are able to retail 
facilities at a substantial discount below cost, they are going to be 
able to seize market share really based on that market power that 
they have developed as a result of their prior monopoly and be- 
cause of their position in the long distance market. 

Senator Thurmond. Mr. Atkinson. 

Mr. Atkinson. Thank you, Senator. I think you have to distin- 
guish between resale competition and facilities-based competition. 
I think it is clear that in the immediate future you will see lots of 
resale competition, but that is pretty illusory kind of competition 
because a reseller who is simply just reselling the incumbent 
RBOC's services has effectively become a sales agent for the RBOC, 
not a competitor. 

Facilities-based competition, on the other hand, is what leads to 
the substantial consumer benefits of competition because that is 
what really puts pressure on the incumbent. The development of 
facilities-based local exchange competition is going to take quite a 
few years simply because it takes a long time to deploy facilities 
ubiquitously up and down every street in every community across 
the country. 

Nevertheless, I am quite optimistic that even the facilities-based 
local exchange competition will develop, but that will be perhaps as 
long as a decade from now. In the meantime, I think policymakers 
particularly have to be not misled by the apparent resale competi- 
tion and mistake that resale competition for facilities-based com- 
petition. 

Senator Thurmond. Mr. Salsbury, what similarities or dif- 
ferences do you see between MCI's early efforts to break into the 
monopoly long distance market and your current efforts to break 
into monopoly local markets? 

Mr. Salsbury. Well, right off the bat. Senator, I can see I have 
a lot more enemies than I did before. I only had one before. I think 
the big difference is that we were able, once the MFJ came about, 
to coi3ront a dominant supplier that had no underlying physical 



66 

reason for its dominance. In other words, AT&T had a market 
share in excess of 90 percent, but it was not because of the facih- 
ties or anything else that they owned and it was relatively simple 
to replicate the network that AT&T had. It took a number of years 
and a lot of money, but there were not any real barriers to doing 
that. 

This situation where we confront in the local business companies 
that are well entrenched, that have a far higher asset base and in- 
vestment than AT&T did — it is very difficult to replicate any of 
their facilities. It often entails digging up streets and it takes a lot 
of time and a lot of money, and we have an entrenched group of 
monopolists that are very opposed to that competition. 

I smiled when I heard Mr. Barr twice talk about we are trying 
to relegate them to the role of wholesalers. I don't really laiow 
what he thinks happens in the long distance industry. We are 
wholesalers and, in fact, Mr. Barr's own company is providing long 
distance service by reselling what they buy at wholesale from Mr. 
Ebbers' company. They get discounts of 80 or 90 percent from us 
and it hasn't seemed to bother us at all. That is competition. 

Senator Thurmond. Mr. Barr, you stated in your written testi- 
mony that more efficient competitors are not in the interest of 
GTE. Does GTE expect any of the merging Bell companies to start 
offering local phone service in competition with GTE in any of the 
regions GTE serves? 

Mr. Barr. Well, as I said. Senator, we have already filed to go 
into their territory and they have filed to come into our territory. 
So I think it is safe to assume that that reflects some potential di- 
rect competition outside our existing franchise. 

To follow up on a point that Mr. Atkinson made, because I com- 
pletely agree with him, the critical thing is getting facilities-based 
competition. That is absolutely essential. People should not be de- 
ceived by reseller competition. There is nothing wrong with resell- 
ing, there is nothing wrong with wholesaling, but if you set the 
prices so low, which the FCC has done — the FCC says that they 
are pricing our system based on the best technology that could be 
put into place and the most efficient design that could be put into 
place today. 

Well, if that is the case, why would anyone want to invest their 
own money in those facilities if they can buy them so cheap from 
the incumbent LEC? What you get then is potential competition, 
not real competition, and that is our concern. So I agree more with 
Mr. Atkinson's point that it is important to foster facilities-based, 
and I was very amused when the FCC came out and they were 
asked specifically at the press conference whether their order dis- 
courages facilities-based competition or encourages it and they 
couldn't come up with the answer. I understand now they finally 
have an answer, which is we didn't know Congress wanted us to 
encourage facilities-based competition, as if there is any other kind 
of competition. 

Senator THURMOND. My time is up. 

Senator Leahy. 

Senator Leahy. Thank you, Mr. Chairman. General Barr, good to 
have you back here. 

Mr. Barr. Thank you. 



67 

Senator Leahy. You probably have spent more time in your life 
before this committee, or parts of it, than you would like to think 
about, but it has always been helpful to the committee when you 
have been here. 

Mr. Barr. Thank you. 

Senator Leahy. Could I go into the Ben and Jerry's versus the 
Leahy household, because I find that kind of intriguing? I hate to 
tell you how many lines I have coming into my old farm house up 
in Vermont, between the Senate switchboard and the fax machines 
and computers and everything else, but there is no question that 
Ben and Jerry's, 5 or 6 miles from where I live, have it a lot dif- 
ferent. 

I ask this because the Vermont Public Service Board issued a re- 
port in January talking about competition and what it might do, 
and they said that residential rates might go up as much as $10 
per household per month to make up for the increased competition 
and the lower rates for business. We are a rural State and for most 
people that would be a big bite. 

Could you comment on what you might see happening to rural 
rates, or rates in rural areas like Vermont, with something like the 
NYNEX-Bell Atlantic merger, or in my State or elsewhere? I am 
asking the same question, really, of Mr. Salsbury and Mr. Atkin- 
son. 

Mr. Barr. I don't see the Bell Atlantic-NYNEX merger really af- 
fecting it. I think that what has to happen and what is not happen- 
ing now is there has to be a decision on universal service which al- 
lows for the rebalancing of rates, but then protects the rural cus- 
tomer against paying unaffordable amounts by providing an ex- 
plicit and rational system of subsidies that everyone contributes to 
so the local company is not the only one subsidizing the rural cus- 
tomer and therefore having a disadvantage so someone can come 
in and skim the cream. 

So we need that universal service issue addressed to protect the 
rural customer as we rebalance rates to make sure they are not 
paying more than an affordable amount. Moreover, the statute has 
in it a rural exemption. I think you may have been among those 
to support it. 

Senator Leahy. Yes. 

Mr. Barr. We certainly support it because we have a lot of rural 
properties. 

Senator LEAHY. I was a supporter of that. 

Mr. Barr. Right, and GTE in many of the States is a very rural 
company, and that provides an additional protection so that the 
local decisionmaker, the State, can make sure that jump-starting 
competition is balanced with the interests of the rural customer. 
But I think we have to get very quickly to the issue of universal 
service, how much do we expect people to afford. Let's get an ex- 
plicit subsidy in place, because I think you can see right now until 
that is done, the local exchange company is operating at a tremen- 
dous and unfair disadvantage because we rely on the subsidy paid 
by Ben and Jerry, but then MFS can come along and just take 
them away because they don't have to rely on that subsidy. 

Senator Leahy. Mr. Salsbury, do you agree with General Barr? 



68 

Mr. Salsbury. Some of the things he said. I do agree that for 
certain customers, I would say that it depends, of course, on popu- 
lation density, how far you are from the serving telephone central 
office; the length of the local loop, which is the primary cost ele- 
ment in your local telephone service. For customers in less dense 
areas who are a long distance away, usually a population density 
of around one person per mile, those customers will need universal 
service support in order to have their telephone service brought 
down to the national average, which is, I think, somewhere be- 
tween $18 and $20 per month. 

I think most of the other customers already today — local services 
is more than compensatory. I would expect the rebalancing that 
Mr. Barr spoke about to really involve a lowering of rates, certainly 
very substantially for business customers, and certainly for resi- 
dential customers, too. They have been paying too much for too 
long. But this will follow from the universal service reform. 

I would add. Senator, that the act really gives three ways for 
local competition to develop. It is very clear on that. One is resale, 
one is the use of unbundled network elements, and one is facilities- 
based competition, construction of new facilities. I know Mr. Barr 
and Mr. Atkinson have focused on the last one, but the other two 
are certainly fully legitimate and are the ways that one would 
enter the market on a mass basis quickly. They provide the most 
hope for residential customers in the near term. 

The wonderful thing about competition. Senator, is that people 
are very inventive when they see a big pot of money on the table, 
and that is what local telephone service is. Right now, the overall 
profit margins for local service are around 35 percent. That is quite 
a good deal higher than they are for long distance and we are anx- 
ious to get in that area. I would certainly assume that rural areas 
would have competition more slowly than the urban areas, but I 
certainly think it will be there. 

Senator Leahy. Mr. Atkinson, what do you feel? 

Mr. Atkinson. I think that universal service proceeding at the 
FCC certainly is a very important step to making sure that rural 
consumers continue to get high quality service. As long as the rural 
consumer effectively has access to that subsidy and can direct that 
subsidy to any carrier, I would expect a dramatic increase in the 
number of entrepreneurial high technology companies that actually 
go to rural areas to pursue the subsidy amount and to introduce 
new technologies that lower the cost and improve the performance 
of rural telephone service. So I think an open universal service sys- 
tem will be a magic key to bring better quality and lower-cost serv- 
ice to rural areas. 

Senator Leahy. The Bell companies under the law have some 
interconnection and unbundling requirements. Now, I assume if 
the Bell companies start merging, they are going to be focusing a 
lot on that merger. Does that interfere in any way with carrying 
out their obligations, some regulatory, some contractual, to opening 
up a local loop? 

Mr. Atkinson. Well, certainly, that is the gist of my testimony. 
Senator. Based on our experience, over the 10 years that our com- 
pany has been in business, we have been dealing with the Bell 
companies and periodically they reorganize internally and have dif- 



69 

ferent departments do different things. And every time they have 
an internal reorganization, their performance, their quaHty, their 
responsiveness to us falls on the floor. 

I just have to imagine that something as huge as merging these 
two companies will exacerbate those historic bureaucratic problems 
to the point where it may make unbundled loops totally unusable 
because every unbundled loop is going to have to be hooked up and 
an order placed and processed by the telephone company, and if 
just the bureaucratic problems, the operations support systems 
that have to be merged and all those problems just inevitably are 
going to develop, unbundled loops and unbundled elements become 
actually unusable and worthless, and that impairs the development 
of the local exchange competition and that is a serious problem. 
That is why our suggestion is that at least the mergers should not 
go forward unless the BOC's are willing to guarantee that they will 
maintain the existing level of service. 

Mr. Barr. Can I follow up briefly on that. Senator? I think it 
would create greater incentive for the RBOCs to meet their check- 
list so they can move into the long distance market. I mean, they 
are going to be focused on that because right now that is the carrot 
hanging out there for them. So I don't think it will inhibit them 
from carrying out those obligations. 

I think that we can't lose sight of some basic realities in the mar- 
ketplace, and Jim Young talked about this. You ask 10 people who 
their local telephone company is. Probably four will say it is AT&T. 
Even before AT&T got into wireless, when you asked people who 
the best wireless company was, 6 out of 10 said it was AT&T, be- 
fore AT&T was even in the wireless business. AT&T has a massive 
brand and you can't lose sight of the fact that that is the legacy 
of the monopoly. 

They also have customers — 60 percent of the customers in our 
territory and in the RBOCs territory are AT&T customers. You 
may be an AT&T customer. Senator. When you get a letter from 
AT&T — and it is this simple — if you got a letter from AT&T that 
said you don't need two bills anymore, we are not going to send you 
a separate long distance bill, we will give you everything on this 
one AT&T bill, and then you got one from your local carrier saying 
the same thing, what makes the local carrier so powerful there? 

I will tell you now. Senator, AT&T is the one with the market 
power in that situation, and that is what is going to happen. Be- 
cause of the FCC rules and the inhibitions and the restrictions 
being placed on the LECs in their own territory and the fact that 
this is a brand-name game, that is what is going to happen. 

Senator Leahy. Thank you. 

Senator THURMOND. Mr. Salsbury or Mr. Atkinson, what is your 
response to the argument that there was no particular reason for 
initially dividing the Bell System into seven Bell operating compa- 
nies instead of five, so there should be no objection now to the pro- 
posed consolidations? 

Mr. Salsbury. I will take that first, Senator. I am sure glad they 
did divide it into seven rather than one. I think really the merger 
analysis that would be applied now is a market power analysis. Is 
there a substantial reason to believe — is it substantially likely that 
allowing these companies to merge would decrease competition in 



40-670 97 - 4 



70 

the local markets or the long distance markets? As I said, Senator, 
there is a substantial reason to believe that. 

First, with respect to local markets, these are the most likely 
competitors against each other. They know the answers. They 
know how the network is put together. They know what to ask for. 
I certainly think we are feeling our way and doing the best that 
we can as quickly as we can, but we don't know everything about 
the local business. They know it. The same way with them coming 
into the local distance business; we know much more about it than 
they do. 

I would minimize somewhat the brand argument that Mr. Ban- 
pointed out because the AT&T was not a legacy of the monopoly. 
That was all after the divestiture. They invested in that, they cre- 
ated that over the last 12 years. The brand before divestiture was 
the Bell System. 

I really do believe that as we go forward, we will see competition 
develop slowly, but these mergers, if they are allowed to go for- 
ward, will impede it. The question should really be asked, is it any 
more likely that competition will be developed in these markets 
with these mergers. As I said, for reasons I said before, these are 
the best, most likely competitors, so I think the answer has to be 
no. 

Senator Thurmond. Senator Leahy, do you have any more ques- 
tions for the second panel? 

Senator Leahy. I do, but I will submit them for the record. I 
know we have a time problem, Mr. Chairman. 

[The questions of Senator Leahy are located in the appendix.] 

Senator Thurmond. We will now move on to the third panel. 
Thank you, gentlemen, for your presence. 

We welcome Mr. Peter Huber, Mr. Robert Crandall, Mr. Robert 
J. Binz, and Mr. Dale Hatfield. You can now make opening state- 
ments of 5 minutes each, starting with Mr. Huber. 

PANEL CONSISTING OF PETER W. HUBER, SENIOR FELLOW, 
MANHATTAN INSTITUTE FOR POLICY RESEARCH, NEW 
YORK, NY; ROBERT W. CRANDALL, SENIOR FELLOW, BROOK- 
INGS INSTITUTION, WASHINGTON, DC; RONALD BINZ, PRESI- 
DENT, COMPETITION POLICY INSTITUTE, DENVER, CO; AND 
DALE N. HATFIELD, CHIEF EXECUTIVE OFFICER, HATFIELD 
ASSOCIATES, INC., BOULDER, CO 

STATEMENT OF PETER W. HUBER 

Mr. Huber. Well, it is an honor to be sitting in the chair just 
vacated by a representative from MCI. Almost 10 years ago today, 
an issue arose under the divestiture decree, which was whether le- 
gally a Bell company had a right to go into another Bell company's 
territory to provide local exchange service. It wasn't clear whether 
that was permitted under the divestiture decree or not. MCI ada- 
mantly opposed it. They said it wasn't allowed under the divesti- 
ture decree; the Bell companies should be strictly barred from en- 
tering each other's markets under the divestiture decree. 

As recently as a year ago — I have been participating in these 
hearings for almost as Long as I can remember and I do notice that 
all this sudden realization that Bell companies are natural com- 



71 

petitors to each other arrived only after the mergers were an- 
nounced. Nobody was Hsting them — and I have gone and looked 
with some care — virtually nobody was listing the Bell companies as 
the principal potential competitors against each other until these 
mergers began being discussed. It just wasn't on the record. 

You may find one or two stray comments, but I can absolutely 
guarantee you, if you look at what the FCC was saying, the De- 
partment of Justice was saying, Senators in this very room were 
saying at the time in one hearing after the next, there was lots of 
talk about who would enter local phone companies and compete 
and it was almost never even mentioned of one Bell company enter- 
ing against another. There were cable companies mentioned, wire- 
less companies, long distance companies, CAP's, MFS, TCG, you 
name it; no Bell companies. They were virtually never mentioned. 

We are fortunate that we don't have to invent our antitrust law 
from scratch. We do have 100 years of history and we have some 
pretty good and well-tested criteria for what kinds of mergers are 
procompetitive and what kinds of mergers are anticompetitive. 

To begin with, antitrust law does not focus on size or access or 
diversity or other popular words of this kind. Antitrust law focuses 
on market power and what will increase market power or change 
market power. Assessed according to that criterion, the real, well- 
tested criterion, the headline-making aspect of all these mergers is 
that there is no headline. They are just pretty boring, unimportant 
events, assessed according to traditional antitrust criteria. 

If, perchance, we ever get these mergers tested in court, I expect 
that is what a judge will ultimately say. Of course, they may not 
be tested in court, but I think if it gets tested in a neutral tribunal, 
that will be confirmed. I mean, market power must be assessed in 
terms of properly defined geographic markets and product markets, 
and this fact is often overlooked. But the local phone markets are 
truly local. A phone in New York does not substitute for a phone 
in Washington, DC, not a local phone. The long distance markets 
are truly national markets. AT&T and MCI have been saying that 
for 12 years and they were right about it. They are not New York- 
Washington, DC, markets, or Dallas to San Francisco markets. 

Second, competition has got to be assessed in terms of a properly 
defined product, and all of the trends in the market, certainly not 
completed yet, but all of the trends are toward a convergence of 
products, cable companies beginning to provide voice over their net- 
works, phone companies beginning to provide video, all of them get- 
ting into data; in fact, voice, video and data all converging into a 
single large digital market. 

In that kind of product market, with those trends in force, the 
aspects for more competition, the promise of more competition is 
very great and these mergers do not implicate that. These mergers 
would implicate that potential for competition if we had Bell Atlan- 
tic merging with TCI in the Washington, DC, service market, or if 
we had SBC and Bell Atlantic merging their cellular operations in 
Washington, DC. Those would raise serious antitrust concerns, but 
merging a local market in New York with one in Washington, DC, 
does not. 

The second point is a term like "access" does not define market 
power. These merged phone companies will have access to quite a 



72 

few homes. DBS satellites have access to about 100 million homes 
in this country. AT&T and MCI in various ways have access to es- 
sentially every home in the country, but none of those measure ac- 
tual market power. We have to look at the real things that do. 
What determines market power is differentiation of service, but all 
the trends in these markets are toward convergence of services and 
rising shares of discreet geographic markets, which these mergers 
do not implicate. 

Thank you very much. 

[The prepared statement of Mr. Huber follows:] 

Prepared Statement of Peter W. Huber 
market presence versus market power 

To the untrained eye, the already huge seem to be getting huger too fast for com- 
fort. Big is said to be inefficient. Or the mega-corporation threatens to become too 
effective and influential for democracy to resist. ^ Sometimes the concerns are baldly 
populist: Big is just plain bad.^ Too-large telecommunicators will end up suppress- 
ing telecommunication — free speech — itself^ Ironically, regulators often help create 
the leviathan that other regulators then condemn- — by granting exclusive franchises 
because economies of scope, network externalities, club theory, and so on, are said 
(by the first gang of regulators) to make a single provider more efficient or egali- 
tarian than competition.^ 

The second gang, however, does not see efficiency: it sees Orwell's dystopian vi- 
sion. Big Brother Inc., a vast and rapacious network octopus, cornering all commu- 
nication and, in the end, controlling everything. Money and commerce are over- 
whelming the marketplace of ideas. ^ Excessive concentrations of capital in media 
businesses are crushing diversity and suppressing expression nationally and even 
globally.*^ They are bringing about a "mutilation of the community's thinking proc- 
ess."^ Time Warner, Gannett, NBC, and "media predators like Rupert Murdoch, 
Robert Maxwell, and Silvio Berlusconi * * * challenge the traditional view, explic- 
itly expressed in the Bill of Rights, that only the state imperils free speech." ^ 

Vivid rhetoric often substitutes for careful analysis. Basic economic principles are 
often muddled — "access" to potential customers, for example, is not market share. 
Video programming is distributed to U.S. households over many different media. ^ 
Over-the-air broadcast reaches 98 percent of households. More than 80 percent of 
American households have VCRs. Cable passes 97 percent. Another 4 percent are 
equipped with home satellite dishes. ^° When fully deployed, DBS and telephone- 
company video services will both reach almost 100 percent. ^^ Thus, many firms can 
have ubiquitous "access," just as both Exxon and Mobil can sell gas to everyone. 
Market share is not measured by who can drive up to your pump, or how much oc- 
tane resides below— it is measured by how much is pumped and paid for. A cable 
network like CNN has "access" to virtually every television household in America, 
yet enjoys a market share (based on viewing time) of only 1 percent. The more "ac- 
cess" a firm has, the more it can compete against everyone else. 

Nor is 'Taigness" in itself an antitrust offense. "Deep pockets" or vast financial re- 
sources may facilitate anticompetitive conduct, ^^ but they do not make it inevitable. 
Concerns about corporate gigantism may have motivated Senator Sherman him- 
self, ^^ but the Supreme Court noted that the Sherman Act "offers no objection to 
the size of a corporation, nor to the continued exertion of its lawful power, when 
that size and power have been obtained by lawful means * * *." '* Size does not 
determine guilt. ^^ 

VOICE, VIDEO, AND DATA 

The new, competitive technologies of the broadband telecosm are too fluid and 
powerful to be locked into the old, simple, regulatory categories of common carriage 
and broadcast. 

This is the most important lesson we have learned from cable. Cable is too capa- 
cious. It does not fit any neat, bureaucratically convenient pigeon holes. It retrans- 
mits over-the-air broadcasts, and when it does, it is essentially a carrier. It provides 
leased lines or "public access" channels, and those are even more carrier-like. It 
transmits cablecasting — that's publishing. It provides two-way phone service — that's 
carriage again. 

It is no longer useful to think of broadband pipes as ordinary wires. They are bun- 
dles of virtual channels, carrying clusters of constantly evolving services. Cable 



73 

channels operated for pure carriage, wthout discrimination, are one legitimate busi- 
ness. Cable channels operated for pure cablecasting are another. Cable channels op- 
erated for phone service, yet another. And the way a channel is peddled and used 
can of course change with time. 

All the other broadband technologies now unfolding are chameleons, too. Both 
radio and television broadcasters also use parts of their spectrum to provide car- 
riage. Many paging services piggyback their signals on FM subcarrier frequencies; 
when the resident from Seattle travels to Miami, her office tracks down the beeper 
in her pocket with the assistance of FM radio stations around the country. Paging — 
a locator service — is bought and sold as common carriage, but it depends on broad- 
casting to locate travelers. 

Satellite technology straddles the old regulatory divisions as well. Satellite opera- 
tors are mostly carriers, except for the four million homeowners who own a large 
enough antenna — for them, satellites are direct broadcasters. Higher-powered sat- 
ellites can reach much smaller antennas. By scrambling signals, and then selling 
decoders, broadcasters redefine themselves as for-pay narrow-casters. Cellular te- 
lephony or television can privatize broadcast spectrum even more. 

Landline phone companies move in the opposite direction. Video dialtone services 
do for video what 976 services did for voice: they effectively transform the telephone 
network into a "broadcast" medium, capable of delivering the Super Bowl to millions 
of households. A dial-a-pom service is far more like a topless radio station than like 
a Sunday afternoon phone call to Aunt Gwendol5Ti in Missoula. Broadcasters, in 
short, are mastering the art of keeping the broad while narrowing the cast. Tele- 
phone companies are keeping their switched, addressable capabilities while widen- 
ing their bandwidth and their reach. Nobody casts drift nets any more. They are 
all fly fishermen now. 

With the advent of digital technology, the old divisions between voice, video and 
data services disappear once and for ail. A full-bore digital, broadband network will 
empower everyone to cast broadly or narrowly at will. The on-line world already 
does so: anyone can create a bulletin board, and anyone can post musings on it, 
whether wise, foolish, tasteful, crass, or crude, to be read by the world. With digital 
broadband technology, the text-based bulletin boards will support voice and video. 
Broadband carriers will have room to carry anything anywhere; on their networks, 
anyone who chooses will be an instant broadcaster. Tomorrow's broadcasters will 
have the power to narrow and address their signals at will; on their networks, any- 
one who chooses will be an instant carrier. 

A few diehard providers may decide to keep their businesses strictly on one side 
of the old definitional line or the other, or be forced to do so by reactionary regu- 
lators. For the most part, however, the clear, familiar legal divisions between car- 
riers and broadcasters will be impossible to maintain. In the broadband telecosm, 
"carriers" and "casters" will compete head-to-head in a single unbounded arena. 

BIG FISH, BIGGER POND 

Because digital services are converging so fast, companies can grow and merge 
while still losing market share. Television used to travel by air, telephone by wire. 
Today, cable is the dominant medium for transporting television signals over the 
last mile to the home. Meanwhile, the fastest growth in telephony is wireless, and 
cable companies have been among the most aggressive and ambitious developers of 
these wireless services. Telephone companies have at hand the technology to carry 
video over their existing networks, and they are now being granted the legal author- 
ity to do so. 

The effects of this convergence are already evident in many previously discrete 
markets. The formerly monolithic Hollywood studios, once the target of major anti- 
trust suits, were largely freed of their consent decree in 1987. '<^ The traditional 
broadcast networks peaked some years ago, and are now steadily losing market 
share. 1'^ Cable has replaced broadcast as the dominant video delivery service, but 
now faces challenges from both telephone company video dialtone and from direct 
broadcast satellite, i® 

The market power of local telephone companies is declining too, though different 
observers disagree sharply about how fast. In the United Kingdom, the incumbent 
local carrier is losing an estimated 15,000 subscribers a month to cable services, pro- 
vided in large part by U.S. cable television companies working in collaboration with 
U.S. local telephone companies. ^^ In the 1990s, wireless technology will compete di- 
rectly with landline services. The FCC projects 60 million users of new generation 
wireless services within ten years.^o Meanwhile, IBM is self-divesting. Even its ad- 
vertising now emphasizes the openness of IBM architectures and the compatibility 
of its wares, both hard and soft, with those provided by other suppliers.^i 



74 

The rising tide of competition in equipment markets is doubly important, because 
the substitutabihty of equipment and service is also increasing. This expands mar- 
kets yet again. There is, for example, a high substitutabihty between information 
processing marketed as a service and information sold as computer software and 
hardware or other equipment. Electronic publishing faces the most direct competi- 
tion from over-the-air broadcasting and print. And while cable was becoming a 
household service, VCRs became a household appliance. 

While the technology is converging, the geographic scope of markets is expand- 
ing.-^' Telecommunication is, by its nature, a boundary-expanding technology'. As the 
geographical boundaries delineating a market expand, the individual players in it 
can grow without increasing (or even maintaining) market share. A minnow growing 
to the size of a whale will still lose "market share" if the pond is transformed, at 
the same time, into the Pacific Ocean. 

That is what is happening in the telecom industry today. The big are indeed get- 
ting bigger, but the market in which they swim is growing even faster. Viewed as 
they must be in the context of the markets for which they contend, the big are 
shrinking even as they grow. Anti-bigness regulation should be shrinking a pace. 

ENDNOTES 

' John S. Shockley, All the Free Speech That Money Can Buy'' The Supreme Court Constricts 
Campaign Finance Reform, in Judging the Constitution 378, 389 (Michael W. McCann and Ger- 
ald L. Houseman eds.. 1989). 

2See, e-g.. Standard Oil Co v. United States. 221 U.S. 1, 83 (1911) (Harlan, J., concurring 
in part and dissenting in part); United States v. ATi&T. 552 F. Supp. 131, 163-64 (D.D.C. 1982) 
(antitrust laws thus "embody 'a desire to put an end to great aggregations of capital because 
of the helplessness of the individual before them.'") (quoting United States v. Aluminum Co. of 
America. 1 F.2d 416. 428 (2d Cir. 1945)>; 21 Cong. Rec. 2457 (1890) (remarks of Senator Sher- 
man) ("[Ilf we will not endure a king as a political power we should not endure a king over 
the production, transportation, and sale of any of the necessaries of life."). Sec generally Owen 
M. Fiss, Why the State?. 100 Harv. L. Rev. 781 (1987). 

^See. e.g.. Ben H. Bagdikian, The Media Monopoly 90-101, 216-20 (1990). Laurence Tribe, 
Toward A Metatheory of Free Speech, in Constitutional Government in America 1 (Ronald 
K. L. Collins ed., 1980); Norman Dorsen, The Need for a New Enbghtenment: Lessons in Liberty 
From the Eighteenth Century, 38 Case W. Res. L. Rev. 479, 492 (1988). 

■*See John Thome, Peter W. Huber and Michael K. Kellogg. Federal Broadband Law §4.2.3 
(Boston: Little, Brown and Company, 1995). 

^See. e.g., C. Edwin Baker, Private Power, the Press, and the Constitution. 10 Const. Com- 
ment. 421, 424-25 (1993); Lee C. Bollinger. Images Of A Free Press (1991). 

^See. e.g., Herbeft I. Schiller, Response: Television Is a Social — Not a Biological or Techno- 
logical—Problem, 68 Tex. L. Rev. 1169. 1170 (1990). 

"Stanley Ingber, The First Amendment in Modem Garb: Retaining System Legitimacy — A Re- 
view Essay of Lucas Powe's American Broadcasting and tlie First Amendment, 56 Geo. Wash. 
L. Rev. 187, 216(1987). 

^Herbert I. Schiller, Response: Television Is a Social — Not a Biological or Technological — 
FVoblem, 68 Tex. L. Rev. 1169, 1170 (1990). The anti-business rhetoric is on occasion openly 
Marxist: "[Tlhe current scene becomes the most advanced stage in capitalism's long history of 
advantaging property rights. Beginning with the ownership of land, the advantage has pro- 
gressed to industrial capital, and now to information." Id. at 1173. 

^ For a time, the FCC recognized that the distribution market for video programming should 
include all sources of video programming. See Notice of Inquiry, Compulsory Copyright License 
for Cable Retransmission, 2 F.C.C. Rec. 2387. 2388 (1987); Jonathan D. Levy and Florence O. 
Setzer, Office of Plans and Policy, FCC. Measurement of Concentration in Home Video Markets 
41-48, 51, 100-101 (1982). Several court judgments have also reflected the determination that 
the video distribution market should be broadly defined. See. e.g.. Cable Holdings, Inc. v. Home 
Video, Inc.. 825 F.2d 1559. 1563 (11th Cir. 1987); Satellite Television & Associated Resources, 
Inc. V. Continental Cablevision, Inc., 714 F.2d 351. 355-56 (4th Cir. 1983), cert, denied. 465 U.S. 
1027 (1984). More recently, however. Congress has required the Commission to take a much 
narrower view of what constitutes "effective competition" against cable. 47 U.S.C. §543(1X1 KB) 
(1994). 

'"About 1 percent receive programming by way of SMATV, which has approximately 1 million 
subscribers. 

"Sf)orts arenas, concert halls, theaters, and 25,000 movie screens provide additional outlets 
and, in principle, have "access" to every consumer who is willing to get in a car or on a subway. 

^'^See. e.g.. United States v. Aluminum Co. of America. 148 F.2d 416, 429-30 (2d Cir. 1945); 
Brown Shoe Co. v. United States. 370 U.S. 294. 317 (1962) (Congress sought to erect barriers 
to "the rising tide of economic concentration."); United States Steel Corp. v. Federal Trade 
Comm'n. 426 F.2d 592, 603-4 (6th Cir. 1970) ("jTlhe sheer size and financial resources of (the 
petitioner) visit non-competitive stabilizing forces upon [its) competitors."); Kennecott Copper 
Corp. V. Federal Trade Comm'n. 467 F.2d 67, 78 (10th Cir. 1972) ("[Petitioner] takes strong ex- 
ception to the Commission's consideration of the anticompetitive effect of its great financial re- 
sources."). 

^^See United States v. Aluminum Co. of America. 148 F 2d 416, 428 (2d Cir. 1945) ("In the 
debates in Congress Senator Sherman himself * * ♦ showed that among the purposes of Con- 
gress in 1890 was a desire to put an end to great aggregations of capital because of the helpless- 



75 

ness of the individual before tlien "). See also 21 Conp. Rec. at 2460 (remarks of Senator Slier- 
man) 

^*United States v United States Steel Corp.. 251 US 417. 460 ( 1920). 

'^According to Professors Areeda and Turner, such arpunenti; are "outside tlie conceptual 

framework of economic 'science, conceptually indefinite," and "intrinsically immeasurable"' 

Phillip Aieeda and Donald F Turner v. Antitrust Late 1] 1 142d ( 1980). 

"'Sec John Thorne. Peter W Huber and Michael K. Kellogg, Federal Broadband Law §83.2 
(Boston: Little. Brown and Company, 1995). 

'"'For example, the networks' aggregate share of the nationwide prime-time viewing audience 
had declined from roughly 90 percent in 1970 to around 66 percent today, and tiieir aggregate 
share of television advertising revenues declined from 48 percent in 197(j to around 3.3 percent 
today. Sec Report and Order. Evaluation of the Syndication and Financial Interest Rules 6 
F.C.C. Rec. 3094, 3108-09 (1991); Second Annual Report, In the Matter of Annual Assessment 
of the Status of Competition in the Market for the Delivery of Video Programming, 11 F.C.C. 
Red '2060, 2114 (1995). Mark Evans, Web Sites Have Content, Need Investors: Market Appeal 
of Content-Rich Internet Sites Suffers From High Valuations, Sluggish Advertising, The Finan- 
cial Post, July 25. 1996. at sec. 2. p. 25. Advertising revenues for the four main networks are 
extrapolated from figures for the first half of 1995. 

'*'Scc Second Report and Order, Telephone Company-Cable Television Cross-Ownership 
Rules. Sections 63.54-63.58, 7 F.C.C. Red 5781, 5797-98 (1992). See also. Speech of Vice Presi- 
dent Albert Grt)re. Royce Hall, UCLA. Los Angeles, California. Jan 11, 1994; The Chicken. 
Maybe; A Chicken in Every Pot and Two Wires Into the Home: the F*rospects for Cable Services 
Offered by Phone Companies, Broadcasting & Cable, Nov. 15, 1993. at 98. 

'^ Dixon. Goodwin & Co.. Technology Assessment— UK CATV/Telephony 2 (Aug 1993). Inter- 
estingly, the telephone portion of the cable-telco combination drove penetration growth for the 
video side. In the first year cable companies offered telephone service, they saw their cable 
subscribership increase by almost 70 percent. By July 1993, less than three years after offering 
cable telephony, the number of subscribers to cable television had almost tripled to nearly 
475,000. Id. 

^° Notice of Proposed Rulemaking and Tentative Decision. Amendment of the Commission's 
Rules to Establish New Personal Communications Services. 7 FCC. Rec. 5676, 5688 (1992) 

2 'IBM's advertising now declares: "The idea of open systems — that computers should easily 
share things and basically behave like friends — is what everyone is aiming for." IBM Advertise- 
ment, Forbes. Nov. 23, 1992. at 202. 

22 William Landes and Richard Posner maintain that a firm's market power is radically refig- 
ured downwards with the expansion of geographic market boundaries. As a firm presses the ex- 
tension of its sales outward, exporting its good or service to non-local regions, production in the 
distant market will Hkewise constrain the exporting firm's market power, even in its home mar- 
ket. William M. Landes and Ricahrd A. Posner, Market Power in Antitrust Cases, 94 Harv. L. 
Rev. 937, 968(1981). 

Senator Thurmond. Mr. Crandall. 

STATEMENT OF ROBERT W. CRANDALL 

Mr. Crandall. Thank you, Mr. Chairman. It is a pleasure to be 
here, Mr. Chairman and Senator Leahy. I have a prepared state- 
ment that I will ask to be submitted for the record and I will just 
summarize very briefly. 

I have been a student of this industry for more than 20 years 
and have probably published about 4 books in the last 8 or 9 years 
at the Brookings Institution on the communications sector of the 
economy. I must tell you, in anticipating some of your questions 
and sitting and listening to others address the previous panelists, 
that when you ask for predictions about how this industry is going 
to shake out now that the 1996 Telecommunications Act is in place, 
I think the honest answer is that we don't know. 

What has happened here is that you have fundamentally shaken 
up an old-line, regulated industry which was in the throes, anyway, 
of major changes caused by rapidly advancing technology. Even the 
experience that we have had from previously deregulated indus- 
tries, I don't think, begins to suggest how dramatic the changes 
will be. 

The changes will be toward much greater competition because 
the most important thing you have done is to eliminate a primary 
barrier to competition, which was the State regulatory commis- 
sion's ability to restrict entry into local and interLATA markets. 
For that, I think you are to be applauded. 



76 

In addition, in the last year, the Federal Communications Com- 
mission has decreed that AT&T is no longer a dominant carrier. 
Whether you believe some of the assertions about how regulation 
combined with other forces in the market to create an implicit car- 
tel of long distances or not, there is no doubt that allowing firms 
to respond more quickly to competitive thrusts, as AT&T now may 
through its nondominant status, means that I think this sector of 
the economy, this part of the industry, will become much more 
competitive. 

Prices have not yet reached their competitive equilibrium in that 
sector, and a good example of that is in the following numbers. 
Today, the average price above access charges for interLATA serv- 
ices in the United States is probably somewhere around 11 cents. 
The long distance companies are today offering their services at 
wholesale to resellers at, for very large deals, somewhere between 
1 and 2 cents, which may approximate what their long-run costs 
are of providing that service. 

The idea that the rest of that margin, 9 to 10 cents, must be ab- 
sorbed by selling costs and administrative costs, I think, is one 
which probably will not be sustained by the marketplace. The rea- 
son why we heard so many people change suppliers each year is 
a function of how high the incremental cost margin really is today. 
So I think that sector of the economy will become much more com- 
petitive as well. 

As Mr. Huber suggested, the mergers which you are considering 
today do not involve mergers of currently competing companies. To 
the extent that they are competing today, it is only in a minor sort 
of way. Their basic local and interLATA services are not in com- 
petition with one another. Also, the question that you asked earlier 
about whether the market would have shaken out as five or seven 
large local companies in the absence of the MFJ in 1984, I think, 
is a very good one. We simply don't know. 

But what we do know is that the companies that are combining 
today are not in fundamental competition with one another. As Mr. 
Huber pointed out, in an antitrust case under the Clayton Act, if 
they are not in competition with one another and you have to fall 
back on a potential competition argument, then, as Attorney Gen- 
eral Barr pointed out, you have to point out that they are uniquely 
positioned to enter this market and no one else would enter, or 
very few others would enter. I don't think that case can be made 
at all. 

Finally, let me point out that in every other industry that we 
have deregulated, there has been a rush of entry, a rush of exit, 
combinations, mergers that succeeded and mergers that failed 
abysmally. In no case would we have predicted that things would 
work as well as they did; that is, costs fell dramatically as a result 
of all sorts of changes in these industries; the entry of UPS, for in- 
stance, or Fed Ex into the small-parcel service that the less-than- 
truckload carriers were involved in. The fact that Southwest Air- 
lines became the most efficient carrier in the airlines industry 
would not have been predicted ab initio. 

I would conclude by saying that I see no threat from these merg- 
ers, but also I don't think anybody testifying before you can tell you 
how this industry is going to shake out. The fundamental fact is 



77 

competition has been enhanced by the lowering and the reduction, 
if not the total elimination, of regulatory entry barriers, and I 
think what we are going to see is a very competitive telecommuni- 
cations sector down the road. But who the players will be, what 
their market shares will be, how many local carriers we have, how 
many long distance carriers we have are something that I think no- 
body can predict at this point. 

[The prepared statement of Mr. Crandall follows:! 

Prepared Statement of Robert W. Crandall » 

Mr. Chairman and members of the Committee, it is a pleasure to appear before 
you today to express my views on the recent merger activity in the telephone indus- 
try. My views are based on thirty years of studying market structure and competi- 
tion in such diverse industries as steel, motor vehicles, communications equipment, 
rubber tire, broadcasting, cable television, and telecommunications services. In the 
past few years, I have been the author or co-author of two Brookings books on tele- 
communications policy. After the Breakup: U.S. Telecommunications in a More Com- 
petitive Era (1991); Talk is Cheap; The Promise of Regulatory Reform in North 
American Telecommunications (1996, with Leonard Waverman); and Cable TV: Reg- 
ulation or Competition? (1996, with Harold Furchtgott-Roth) as well as of nimierous 
articles dealing with telecommunications issues. I have also served as a consultant 
to numerous telecommunications companies, including the members of the U.S. 
Telecommunications Association in the FCC's recent interconnection proceedings. 

The recent mergers in the telephone industry are but one manifestation of a tre- 
mendous upheaval in the industry. Rapid technological change and dramatic 
changes in government regulatory policies have been unsettling to the estabhshed 
order. One can no longer confidently discuss the future of local telephone companies, 
cable television firms, or long-distance companies without realizing that each is 
poised to enter the other's business and that numerous other entrants lurk on the 
periphery with new wireless or satellite technologies, Change is coming in ways that 
few of us, including the executives of large telephone companies, can predict. 

The inevitable impact of these changes is a divergence in the views of market par- 
ticipants as to the winning technologies or strategies. Some may view the large 
wireline investment of local telephone companies as the source of a "first-mover" ad- 
vantage while others may see this inherited plant as a lodestone around the necks 
of the local companies. Those with the more bullish views will be buyers of LEC 
assets — as portfolio investors or acquirers — while others may be sellers. 

This year, two large mergers between Regional Bell Operating Companies have 
been announced. SBC Communications has announced its intention to acquire Pa- 
cific Telesis, and Bell Atlantic has announced its intention to merge with NYNEX. 
Both mergers involve the combination of two, largely non-competing, local telephone 
companies that have a variety of other businesses, including domestic wireless oper- 
ations, a number of wireless and wire-based video operations, and international in- 
vestments. 

THE structure OF U.S. TELECOMMUNICATIONS MARKETS 

The 1996 Telecommunications Act will have a dramatic effect on the structure of 
U.S. telecommunications markets. Until this year, the Regional Bell Operating Com- 
panies (RBOCs) have been barred from interLATA service markets by the AT&T de- 
cree, and most states have barred entry into their local telephone markets. The 
1996 Act will change all of this, entry into the local and interLATA markets will 
now be open, although the RBOCs' interLATA entry requires the scaling of a few 
regulatory hurdles. 

The interLATA markets have become increasingly competitive, but it is likely that 
prices in these markets have not yet reached a competitive equilibrium. AT&T's 
share has fallen to less than 55 percent of the revenues of all long-distance carriers, 
while the shares of MCI, Sprint, and LDDS Worldcom now total about 33 percent. 
However, AT&T had more than 70 percent of presubscribed Unes as of December 
1994. Equally important, these large carriers are now poised to enter the local and 
intraLATA long-(fistance markets, using a variety of technologies and market strate- 
gies. 



•The views expressed herein are solely my own. They should not be taken to represent the 
views of the Brookmgs Institution, its other staff members, or its Trustees. 



78 

The local exchange markets are now open to competitive entry through the con- 
struction of new facilities, the leasing of the incumbent local carriers' unbundled fa- 
cilities, or resale. The number of potential entrants using any of variety of such ap- 
proaches is very large. Obviously, each of the four large long-distance companies is 
now pursuing its own strategy for entering local markets. Each of the large cable 
companies, such as TCI, Time Warner, Jones Intercable, Cablevision, or Cox loom 
as major threats to incumbent telephone companies because of the existing cable 
plant whose backbone is being converted rapidly to fiber optics. A large number of 
smaller companies are either negotiating interconnection agreements or have signed 
such agreements with the major local-exchange companies already. Three new wire- 
less competitors are poised to enter each local market, having paid between $4 bil- 
lion and $10 billion nationwide in recent FCC spectrum auctions. Motorola is build- 
ing a network of low-orbiting satellites that will be capable of ofiiering connections 
to U.S. businesses or households in the near future. Each existing local telephone 
service provider — whether an RBOC or an independent company — is a potential en- 
trant into all of the others' markets. In addition to the seven RBOCs, there are at 
least five other local telephone companies — Alltel, Cincinnati Bell, Frontier, GTE, 
and Southern New England Telephone — that could pursue such expansion. Finally, 
there are a variety of other large companies, some with telecommunications invest- 
ment and some without, as well as numerous foreign carriers that could enter the 
market for local communications in the United States. 

In short, with entry barriers lowered or removed by the 1996 Act, there is now 
the potential for substantial entry into all aspects of U.S. telecommunications. Given 
the rate of technical change and the possibility of exploiting joint economies in deliv- 
ering of marketing a variety of communications services to the household— local te- 
lephony, long-distance service, Internet connections, and video — we are about to wit- 
ness the collision of very large players in the marketplace. 

The two major RBOC mergers announced recently do not involve companies that 
are direct competitors in local or intrastate toll markets. Rather, the two mergers 
involve companies that are in adjacent territories or even farther away. Even if 
these companies were potential entrants into each others' markets in the absence 
of the mergers, with so many potential entrants it is difficult to see how a few merg- 
ers among largely non-competing local-exchange companies could affect the vitality 
of this competition. 

POTENTIAL BENEFITS OF TELECOM MERGERS 

When any industry is subject to the external shocks of technical change and de- 
regulation, existing firms will find it necessary to adjust rapidly to meet the devel- 
oping competition. The result will be a variety of new investment plans, asset write- 
downs, and acquisitions. Some of these decisions will prove successfiil; others will 
not. But no one can predict at this juncture what the winning strategy will be in 
such a dynamic industry as telecommunications. 

Indeed, no one could have predicted how even less technologically-dynamic indus- 
tries, such as airlines and trucking would adjust to deregulation. In both industries, 
there were large numbers of new entrants, large mergers, and a substantial number 
of bankruptcies. For instance, PanAm and National Airlines merged and ended in 
bankruptcy; Northwest and Republic merged and have survived by combining their 
networks. Southwest has expanded successfully without acquisitions. In the LTL 
trucking sector, the large carriers have pursued an aggressive acquisition strategy, 
greatly reducing their operating costs, and rates as a result. Many other LTL car- 
riers have been forced to exit in the face of the sharply declining rates. 

In telecommunications, the pace of technical change is much more rapid than it 
has been in the transportation sector. Faced with the prospects of new entry into 
their core markets, the major companies must devise new strategies. MCI, AT&T 
and Sprint are each beginning an assault on local markets with different strategies. 
The local operating companies will have to respond by improving their efficiency, 
building new facilities, and expanding their services. There is no reason to believe 
that the current geographical boundaries of these companies' local service areas cre- 
ate the most efficient agglomerations to offer telephone and video services. Nor is 
it likely that these companies are emerging from decades of state regulation with 
the most efficient structures or operations. 

One way for the local carriers to improve their efficiencies and develop a variety 
of services through which they can exploit joint marketing economies is through ac- 
quisitions. For example, the Bell Atlantic-NYNEX merger could conceivably lead to 
much more efficient operations in the New York metropolitan area or allow greater 
efficiencies in marketing local telephony, long-distance service, and video services 



79 

along the east coast. These efficiencies, hke the efTiciencies obtained in the LTL 
trucking mergers, would be reflected in lower rates for consumers. 

Mergers also provide an opportunity for new management and a new approach 
to organizing and operating firms in a changing environment. Both the SBC-Pacific 
Telesis and Bell Atlantic-NYNEX mergers may provide such opportunities. 

CONCLUDING COMMENTS 

There is nothing about the recently-announced telecom mergers that need concern 
the Congress or the antitrust enforcement agencies. Because the largest of these 
mergers involve combinations of essentially non-competing firms, it is unlikely in 
my view that the antitrust authorities will be able to or should be able to block 
them in the courts. No one can know how the telecommunications sector will de- 
velop in the next few years with deregulation and the liberalization of entry. But 
with so many large players attacking one another's turf, it is difficult to see how 
competition is threatened by these mergers. Congress has opened the door wide to 
competition with the passage of the 1996 Act. A few large mergers will not even 
begin to close it and may open it even wider. 

Senator THURMOND. There is a vote in the Senate. We will have 
to take a recess for about 10 minutes and we will be back at that 
time. 

Senator Leahy. Mr. Chairman? 

Senator THURMOND. Senator Leahy. 

Senator Leahy. Mr. Chairman, I am not sure whether I will be 
able to get back, but if I don't 

Senator THURMOND. Would you like to go ahead now? 

Senator Leahy. I wonder if I might just ask one question now, 
but then submit the rest for the record. 

Senator THURMOND. Senator Leahy will ask questions. I will go 
and vote and come back. 

Senator Leahy. I was just thinking that Mr. Ebbers said in the 
earlier panel that neither WorldCom nor MFS is the incumbent 
monopoly or former monopoly. Both have market share in the sin- 
gle digits. He said a merger between the two companies would be 
a big yawn in terms of antitrust issues. Do you agree with that? 

Mr. Crandall. Are you asking 

Senator Leahy. Any one of you. Mr. Crandall? 

Mr. Crandall. I think Mr. Huber said it would be a big yawn 
in terms of antitrust issues. I don't think having been a former mo- 
nopolist is a criterion for being a fighting tiger. The fact that these 
two firms are former monopolists probably means that they have 
been spared the necessity of having to respond to competition and 
be as fighting mean and lean as they otherwise would be. I think 
I would rather go up against former monopolists. 

Senator Leahy. You are not saying that WorldCom or MFS are 
former monopolists, are you? 

Mr. Crandall. No. I am saying that the mere fact that the re- 
gional Bell operating companies or their antecedent company, 
AT&T, were monopolists at some point in history because of regu- 
latory protection does not make them such formidable opponents; 
quite the contrary. 

Senator Leahy. In trying to make it easier for the home viewers, 
we have now the Senator who actually is a man with a full head 
of hair, but he apes my hairline, Senator Simpson, who has come 
here to fill in to keep the continuity going, and we will correct the 
record on that part afterwards. [Laughter.] 

Senator Simpson [presiding]. I think we should correct it right 
now. 



80 

Patrick, I have not voted because I have been rambHng around. 
I believe that the testimony hasn't even been completed here. It is 
one of those days as we drawn down to the end, but I have a state- 
ment and it will be inserted into the record as if read in full. 

[The prepared statement of Senator Simpson follows:] 

Prkfarkd Statement of Senator Aij\n K. Simeon, a U.S. Senator From the 

State of Wyoming 

First, I want to address my good friends Senator Hatch and Senator Thurmond 
and commend both of you for scheduling the hearing to examine the issue of com- 
petition in the telecommunication industry. Although this is a full committee hear- 
ing, its subject matter is clearly antitrust and I wanted to come by today — in what 
is likely to be my last antitrust hearing in the Senate — 16 say a few words of tribute 
to the man who urged me to serve on this committee nearly 18 years ago. He is 
my loyal friend, mentor, and always the "Chairman," Senator Strom Thurmond. 
Strom, you have been an inspiration to me and to so many other colleagues because 
of your integrity, your commitment to principles, your unparalleled political acumen, 
your physical vitality, and for your great devotion to public service. You will have 
seen two Simpsons come and go through here and for the benefit of others who will 
follow me, I hope that you will remain here to provide them with the kind of leader- 
ship and friendship that you always showed my father and have always shown me. 

I think we would all agree that one of the most historic achievements of the 104th 
Congress was enactment of the Telecommunications Act of 1996. Our goals were to 
increase competition, to create new job opportunities, and to provide better products 
and services for the consumer at better prices. 

In simple terms, we seek to change the face of the local exchange marketplace 
and increase competition in the long distance field. These are ambitious goals that 
have been many years in the making and I strongly believe we need to do all we 
can now to ensure that the Telecommunications Act, as implemented, has the best 
chance to achieve these goals. 

The announcements of proposed mergers between certain Bell companies come at 
a time when we are still at the earliest stages of determining how best to implement 
this act, and how we can achieve the greatest benefits from enhanced competition. 

I am not here to advocate that our committee should micromanage the proposed 
mergers. I do believe, however, that at this critical time of policy implementation, 
we have a duty in our oversight capacity on "antitrust, business rights, and competi- 
tion," to examine whether industry consolidation will promote or hinder the primary 
goal of the act — that is, to foster real competition in the telecommunications indus- 
try. 

There has been such a remarkable growth in the long distance market over the 
past 10 years that today— although three companies still dominate the market — 
hundreds of new companies are entering and competing for customers. Long dis- 
tance rates have fallen and consumers are being offered better products and more 
responsive service. Today, Wyoming consumers have a choice between 15 long dis- 
tance carriers — something that was unheard of 10 years ^go. The new telecommuni- 
cations law should enable them to eventually benefit from similar competition in the 
local service market. 

The Telecommunications Act will provide opportunities for small companies to 
compete for both long distance and local service markets in States like Wyoming. 
I voted in favor of this legislation precisely because I felt it would promote competi- 
tive pricing and enthusiastic and competent service, not only for my constituents, 
but for every "Joe six-pack" American, who today is forced to buy local service from 
a monopolistic provider. 

I have not had an opportunity to review either of the merger proposals that are 
under such intense consideration by the industry and by State public service com- 
missions, so I do not want to explore or comment on their merits here. Instead, I 
will simply impart to you my firm belief in the goals of the Telecommunications Act 
and my sincere interest in seeing them become a reality. We must follow through 
on our commitment to allow market entry and real competition so small businesses 
can offer services people not only want, but that they choose. In order to create jobs, 
improve systems, increase competitiveness, and lower prices, we must keep a vigi- 
lant watch to ensure that we are moving steadily away from monopolistic condi- 
tions — never toward them. 

I thank Senator Hatch and Senator Thurmond for the opportunity to make these 
remarks. And 1 thank all of the witnesses who took time to be here to present their 



81 

testimonies today. Unfortunately, I have a scheduling conflict and must excuse my- 
self, but I will be carefully reviewing the record. 

Senator SIMPSON. I said to all the industry, I remember, when 
all of this started — all the industries; I remember all of them — I 
said something to the effect I hope that you can eventually work 
this out among yourselves because if you drag it in here, we will 
do it, but it won't be done right. And they all laughed, you know; 
well, we need to have it come to Congress. 

It is my experience in 18 years here that you would have done 
a lot better if you had all just gotten together because we will do 
it and we will keep doing it and the theme will be, you know, to 
bust up monopolistic practices and let everybody in, take everybody 
and put them in a black burlap sack and shake them up and let 
them claw each other's eyeballs out. The fire alarm people will be 
doing cable television and the cable television people will be doing, 
I don't know, left-handed elbow fiber optic cubes, and that is what 
is going to happen simply because we don't have time to under- 
stand the tremendous complexity and intricacies of the businesses. 
And nobody feels sorry for anybody because everybody is making 
a wad. At least that is the way the American public looks at it. 

What are we doing with these huge entities, all of them remark- 
able American corporations, all of them the epitome of capitalism? 
What are we doing? So I won't be here next year, but I can assure 
you that as I see the theme of it, it will be to just continue to try 
to see that everything is opened up in a way that is best for one 
single person, and that is the consumer. 

I know you all say continually that that is the great desire, but 
sometimes it is not. It comes down to things like greed and squeez- 
ing out somebody else, and if you are bigger, we are going to try 
to prevail to get bigger yet. Anyway, competition is the theme and 
I hope we can do it in a way — I haven't reviewed either of the 
merger proposals that are under intense consideration and I don't 
want to comment or explore the merits here, but simply say my 
firm belief is in the goals of the act that we tried so hard to do cor- 
rectly, that it becomes reality, that we follow through on the com- 
mitment to allow market entry at all levels, real competition at all 
levels, so the little gi^ys in the small business can offer services, 
and people want those services, but that they are able to choose 
those services in order to create jobs and improve systems and in- 
crease competitiveness and lower prices, and keep a vigilant watch 
to ensure we are moving steadily away from monopolistic condi- 
tions and never toward them. 

So, with that theme, as I say, I remember when it all started, 
and Lord knows you have been through an anguishing time. I hope 
we can do it right, but don't expect that it will ever really be done 
right here in the legislative arena because of the obvious complex- 
ities and the need for regulatory reform and control, and so on. 
Now, with that ringing little tidbit, I must press on to go vote. I 
was stalling, and no one is here. [Laughter.] 

Senator Thurmond said he would be back, so we are going to 
have to recess for a few minutes, if you will please do that, and 
thank you for the opportunity of making some remarks. I am sorry 
about the situation. We will recess until the return of the Chair. 

[Recess.] 



82 

Senator Thurmond. The committee will come to order. 
Mr. Binz, I don't believe you have made an opening statement 
yet, have you? So you go right ahead for 5 minutes. 

STATEMENT OF RONALD BINZ 

Mr. BiNZ. Thank you, sir. Mr. Chairman, my name is Ronald 
Binz and I am president of the Competition Policy Institute. CPI 
is a nonprofit organization which advocates State and Federal poli- 
cies to bring competition to energy and telecommunications mar- 
kets in ways that will benefit consumers. CPI was established in 
March of this year and received its initial funding from a group of 
new entrants into the telecommunications markets. We develop our 
policy positions independent of the funding sources and in consulta- 
tion with an advisory board of consumer advocates from around the 
country. 

We applaud the committee for holding this hearing to consider 
the effect which mergers in the telecommunications industry will 
have on competition and consumers. We are deeply concerned 
about the rapid consolidation of major players in the telecommuni- 
cations marketplace and very much appreciate the opportunity to 
appear before the committee today. 

The Telecommunications Act of 1996 was a landmark act and it 
was passed by the Senate and House in overwhelming majorities 
this year because it contained a balance between deregulation and 
competition. Loser ownership restrictions were accompanied by 
strong measures to enable and encourage the growth of competition 
in all telecommunications markets. Unfortunately, the mergers of 
several key industry players may upset this balance and harm both 
the interests of competition and consumers. 

Mr. Chairman, I would like to make three points in this testi- 
mony. First, the FCC and the States are working hard to adopt 
rules necessary to implement the Telecommunications Act of 1996, 
but progress toward local exchange competition has just begun. 
Local exchange competition is pretty much still just a theory and 
it is far too early to conclude whether it will develop in all markets. 

As you know, the FCC order just issued which implements the 
local competition sections of the act was just recently issued by the 
FCC. Negotiations among carriers have begun, but most negotia- 
tions have ended in stalemates and are being referred to State 
commissions for arbitration. Thus, while competition is permitted 
in theory, I do not know of a single residential customer in the 
country that has a choice for local service providers. Most small- 
business customers do not have a choice for local telephone service. 
I think we have been lulled into the impression here by these first 
few panels that local competition is rampant. It is not yet. 

It is also troubling that, one by one, the large incumbent local 
exchange companies have announced their intention to appeal the 
FCC's new rules. Unfortunately, any momentum gained by the 
prompt action of the FCC in response to the aggressive deadlines 
set by Congress will be lost if the companies succeed in obtaining 
a stay of that decision in court. 

My second point is the procompetitive effects of the act may be 
jeopardized by the consolidation of large telecommunications car- 
riers. Simply put, mergers remove potential competitors from mar- 



83 

kets which have just been opened to competition. Some pending 
mergers create stronger monopolies, having greater resources with 
which to thwart potential competitors. 

Since the passage of the 1996 act, the concentration of ownership 
in the industry is proceeding much faster than the growth of com- 
petition. If consolidation continues to outstrip the growth of com- 
petition, the goals that Congress endorsed in the 1996 act may not 
be achieved. Consumers may end up with higher rates and fewer 
competitive choices. 

My third and final point is the announced mergers of the re- 
gional Bell operating companies are especially menacing to the fu- 
ture of local exchange competition. We recommend two measures 
designed to mitigate the harm to consumers and to competition. 
First, these mergers should be considered only after the FCC has 
certified that the companies have met the competitive checklist in 
the Telecommunications Act for each of the States in which they 
operate today. 

Second, regulators should require that the claimed benefits of the 
merger flow through to consumers in the form of lower rates. If 
compliance with the checklist is a precondition to considering these 
mergers, it is much more likely that competition will develop in 
local markets and that the damage to competition from the merg- 
ers will be mitigated. Importantly, this can be achieved without im- 
posing additional requirements on the RBOC's beyond those al- 
ready present in the 1996 act. 

While mergers are often justified by claims of cost savings from 
increased efficiencies, consumers may never see those savings. 
When considering whether to permit the mergers, regulators 
should require that the promised benefits result in lower rates to 
consumers. However, regulators should not trade short-term bene- 
fits for the long-term damage to the development of competition 
which some of these mergers might cause. 

The goals of the Telecommunications Act were correct, to pro- 
mote a more competitive deregulatory marketplace for goods and 
services. Policymakers should ensure that the RBOC's take effec- 
tive steps to enable competition for local services in each and every 
State they serve, and ensure that consumers actually benefit from 
the cost savings. 

Once again, Mr. Chairman, thank you for conducting this hear- 
ing on this important matter and for the opportunity to testify. 

[The prepared statement of Mr. Binz follows:] 

Prepared Statement of Ronald Binz 

Mr. Chairman and Members of the Committee, my name is Ronald Binz, and I 
am President of the Competition Policy Institute. The Competition Policy Institute 
(CPI) is a non-profit organization which advocates state and federal policies to bring 
competition to telecommunications and energy markets in ways that benefit con- 
sumers. CPI was created in March of this year and has participated in proceedings 
before the Federal Communications Commission (FCC), the State-Federal Joint 
Board on Universal Service and state regulators. 

CPI applauds the Committee for holding this hearing to consider the effect which 
mergers in the telecommunications marketplace will have on competition and con- 
sumers. We are deeply concerned about the rapid consolidation of major players in 
the telecommunications marketplace. 

The landmark Telecommunications Act of 1996 passed the Senate and the House 
by overwhelming majorities earlier this year because the Act contained the right 
balance between deregulation and competition. The substantial loosening of owner- 



84 

ship regulations contained in that legislation was accompanied by equally strong 
measures to allow the growth of competition. Unfortunately, the mergers of several 
key industry players has tipped the balance against the interests of competition and 
consumers. Since passage of the 1996 act, the concentration of ownership in the 
telecommunications industry is proceeding much faster than the growth of competi- 
tion. If this industry consolidation is allowed to continue unchecked, the pro-com- 
petitive goals that Congress endorsed in the 1996 act may not be achieved, and con- 
sumers may end up with higher rates and poorer service quality. 

In the testimony that follows, I will discuss some current events in telecommuni- 
cations which lead me to the following conclusions: 

The FCC and the states are working hard to adopt the rules necessary to imple- 
ment the Telecommunications Act of 1996, but progress toward local exchange com- 
petition has just begun. It is far too early to conclude whether competition will de- 
velop in all telecommunications markets. 

The pro-competitive effects of the Telecommunications Act of 1996 may be jeop- 
ardized by the consohdation of large telecommunications carriers. Simply put, merg- 
ers remove potential competitors from markets which have just been opened to com- 
petition and some of them create larger monopolies that have greater resources with 
which to thwart potential competitors. 

Mergers of telecommunications carriers will have potential cost and potential ben- 
efits for consumers. Regulators and policy-makers must take affirmative steps to 
minimize the cost and ensure that consumers benefit. Regulators must be particu- 
larly careful of the effect of any merger on competition. Any short-run benefits such 
as cost efficiencies will be dwarfed by the long-run damage to consumers if the de- 
velopment of competition is stymied by such mergers. 

The announced mergers of the Regional Bell Operating Companies (RBOCs), Bell 
Atlantic-NYNEX and SBC-Pacific Telesis, are especially menacing for the future of 
local exchange competition. These mergers should be considered only after the com- 
panies have met the "competitive checklist" contained in the Telecommunications 
Act of 1996 for each of the states in which they operate today. 

I. STATUS OF LOCAL COMPETITION 

The efTect of the legislation on the development of competition for local telephone 
service is just beginning to be felt. The FCC just last month released its initial set 
of rules governing how competitors may interconnect with the networks of the in- 
cumbent local telephone companies. Not surprisingly, several of the incumbent tele- 
phone companies have petitioned to stay and overturn the new rules. GTE, one of 
the largest telephone companies, has asked to be treated as a rural telephone com- 
pany so that it can be exempted from the new unbundling rules. 

In the meantime, states are considering their own rules to implement the 1996 
Act. Most states have waited until the FCC published its rules before moving for- 
ward. 

Pursuant to Section 251 of the Telecommunications Act of 1996, competitors to 
the incumbent local telephone companies must first engage in negotiations with the 
incumbent telephone companies before they can take advantage of the new rules. 
If the parties to these negotiations do not reach agreement, and, to date, many of 
them have not, the parties must petition the State regulatory officials to arbitrate 
any contested issues. Many of these arbitration decisions are expected in October 
and November. Under the 1996 Act, either party to the negotiations may then chal- 
lenge these arbitration decisions in federal court. 

Competitors to the incumbent telephone companies are growing but are far small- 
er than the incumbent telephone companies. According to one industry analyst, com- 
petitors to the local telephone companies earned about $1.3 billion in revenues in 
1995, which is less than 1% of the total market for local telephone service. 

Of course, another way to judge the scope of competition for local telephone serv- 
ice is to examine the consumer perspective. Frankly, I do not know of one residen- 
tial consumer who has a choice among alternative providers of local telephone serv- 
ice today. 

II. CONSOLIDATION IN THE COMMUNICATIONS MARKETPLACE 

While competition is developing slowly, virtually every sector of the communica- 
tions marketplace has seen substantial consolidation. In the broadcast field, Wes- 
tinghouse acquired CBS; Disney acquired CapCities/ABC, and Fox acquired New 
World in multi-billion dollar transactions. Hundreds of radio stations have changed 
hands in transactions totaling hundreds of millions of dollars. In the cable industry, 
Time Warner is about to take control over Turner Broadcasting System for $7.5 bil- 



85 

lion, creating the largest media company in the world. Continental CableVision, the 
third largest cable operator, is being acquired by USWest for $10.2 billion. 

The increasing concentration of ownership in the media raise significant questions 
about whether American consumers are receiving a diversity of views, or whether 
their information will be subjected to excessive control by a few corporations. These 
mergers also raise questions about the ability of independent voices to obtain access 
to the marketplace of ideas. And, finally, these media mergers raise competitive con- 
cerns about the ability of small broadcasters and independent programmers to com- 
pete in a highly-concentrated marketplace. CPI urges Congress to take a closer look 
at these issues in future hearings. 

III. ANALYSIS OF THE MERGERS OF TELECOMMUNICATIONS CARRIERS 

Of all the mergers announced to date, the biggest mergers by far are those of Bell 
Atlantic and NYNEX, on the one hand, and SBC and Pacific Telesis on the other. 
If the mergers are permitted to go forward, both corporations will become two of 
the top corporations in the country and in the world. 

The other significant merger in the telecommunications industry is the proposed 
merger of LDDS WorldCom, the fourth largest long distance company, and MFS 
Communications, the largest competitive access competitor to the incumbent local 
telephone companies. 

CPI believes that the potential costs and benefits of each merger must be ana- 
lyzed on a case-by-case basis. CPI does not believe that mergers in the telecommuni- 
cations industry are necessarily harmful to consumers and competition. The follow- 
ing discussion presents an analysis of several of the factors that Congress may use 
to assess the impact of these mergers on competition and consumers. 

1. Efficiencies 

All of the major players involved in the mergers assert that the mergers of their 
companies will help them to reduce their costs and will make them stronger finan- 
cially. For instance, Bell Atlantic estimates cost savings of at least $600 million an- 
nually. Most analysts agree that Pacific Telesis (PacTel) has been weakened by the 
spin-off of its cellular business and its reduction of intraLATA toll rates. The ana- 
lysts generally agree that PacTel could benefit from its alliance with SBC, one of 
the strongest RBOCs. 

If true, these costs savings and stronger financial backing would be beneficial to 
the companies. CPI is reluctant to second-guess the business judgments of the prin- 
cipals in these companies concerning whether these mergers are good for the compa- 
nies. I would only note that some mergers have provided to be beneficial to the com- 
panies, while others, such as AT&T's acquisition of NCR, have not. 

The important question for policy-makers, however, is not whether these mergers 
will benefit the companies, but whether the mergers will benefit consumers. If the 
mergers were necessary to keep the failing companies afloat so that consumers 
could continue to receive telephone service, the mergers would undoubtedly be bene- 
ficial for consumers. Consumers would also benefit if the cost efficiencies were 
flowed through to ratepayers in the form of lower rates for basic telephone services. 

At most, however, the companies argue that the mergers will put them in a 
stronger financial position as they face increasing competition. CPI questions wheth- 
er stronger, larger companies, particularly companies with monopoly power over 
local telephone service, wall mean better service and lower rates for consumers, or 
simply greater profits for the principals and the shareholders. 

2. Jobs 

SBC-PacTel claim that the merger will result in over 1,000 new jobs in California, 
while Bell Atlantic-NYNEX assert that the merger may result in the loss of 3,000 
administrative and management jobs, but no loss of blue collar jobs. It is not clear 
at this point whether the LDDS-MFS merger will create more jobs or lead to fewer 
jobs for the merged company. 

It is ironic, to say the least, that the RBOCs would make these claims concerning 
jobs at the same time that they claim that the mergers will produce cost savings. 
Labor costs are one of the biggest operating costs of these companies. It is also of 
interest that the Communications Workers Association opposes these mergers due 
in part to its concerns about the effect on their union jobs. And while SBC-PacTel 
claim that they will add 1,000 jobs to California, it should be noted that SBC and 
PacTel have cut a total of about 11,000 jobs over the past few years. 

Even though the loss of every job is important, policy-makers need to look at the 
effect on jobs in relation to the entire industry. According to Business Week maga- 
zine, AT&T and the RBOCs have cut about 250,000 jobs since the divestiture. Many 
of these jobs losses have been absorbed by increasing employment in other sectors 



86 

of the communications industry. In fact, according to Business Week, total industry 
employment has risen by 54,000 over the past two years alone, and the converging 
world of communications, computers, and entertainment has generated 400,000 new 
jobs in the past year, about 20% of the total new jobs in the economy. 

3. Loss of a competitor 

All three of these mergers will result in the loss of a potential competitor for local 
telephone service. Most analysts, and I suspect, most Members of Congress, as- 
sumed that the seven RBOC's would begin to invade each others' markets and com- 
pete with each other for local telephone service once the Telecommunications Act 
removed the barriers to competition. In fact, this expectation is explicit in the manu- 
facturing section of the legislation which prohibits any RBOC from manufacturing 
in conjunction with another RBOC. (47 U.S.C. 273(a)) Similarly, it was assumed 
that LDDS would also begin to compete for local telephone service, and MFS was 
already a competitor. From this perspective, all three of the proposed mergers have 
a negative influence on the number of competitors. 

But, it is not enough simply to examine the number of potential competitors. The 
analysis should also include an evaluation of the likely success that each of these 
competitors would have had on the market. While LDDS and MFS certainly have 
the desire to compete with the incumbent telephone companies, their actual ability 
to do so as separate entities is uncertain. As mentioned earlier, the rules of local 
competition are just being developed, and MFS and LDDS are relatively small com- 
panies compared to the RBOC's. While MFS has been providing competitive access 
service for the past few years, neither MFS nor LDDS has been providing basic local 
telephone service. Thus, while the LDDS-MFS merger reduces the number of poten- 
tial competitors by one, it may not reduce the quality of the competition. In fact, 
there is an argument that the merger could strengthen the company's ability to 
compete for local service by providing greater revenues and greater amounts of in- 
vestment capital. 

With regard to the RBOC's, the obverse may be the case. RBOC's certainly have 
the financial ability to compete with each other; it is their desire to compete that 
is somewhat in question. The RBOC's have extensive experience in proxnding local 
exchange service and enormous revenues streams. The RBOC's average about $14 
billion in annual revenues. They have the economic and poUtical know-how to enter 
new markets, as they have shown with their extensive international investments. 

The RBOC's already compete with each other for some services. Many of the 
RBOCs' cellular subsidiaries already compete with each other, as oftentimes both 
cellular licenses in a market are owned by an RBOC. USWest has applied to provide 
competitive telephone service to BellSouth in Atlanta, for instance. Bell Atlantic and 
NYNEX have already announced plans to provide long distance service outside of 
their regions, and NYNEX recently received approval from the California Public 
Utilities Commission to provide competitive long distance service as a reseller in 
that state. 

At the same time, the RBOC's have also shown an inclination to join forces rather 
than compete. For instance, Bell Atlantic and NYNEX merged their cellular oper- 
ations a few years ago, and these same cellular subsidiaries joined a consortium 
with USWest in an effort to provide seamless, nationwide mobile communications 
services in 1994. Bell Atlantic, NYNEX and Pacific Telesis have also joined to form 
TEhE-TV, a new company intending to provide educational and entertainment pro- 
gramming over their "wireless cable" systems. SBC joined with Ameritech, 
BellSouth and the Disney Corporation in 1994 to create a similar programming en- 
tity. 

It is difficult to predict at this time how strongly the RBOC's would compete with 
each other for local telephone service in the future if not for these mergers. Bell At- 
lantic and NYNEX would have been considered prime competitors because of their 
common interest in the New York City metropolitan market which adjoins the Bell 
Atlantic region in New Jersey. SBC ovms cellular licenses in California, which 
could, at some point in the future, be used to compete with Pacific Telesis. Many 
observers believe that the future development of the market would have driven 
these companies to compete with each other in the future even if they did not have 
plans to compete at this time. But one point is certain — if these mergers are per- 
mitted, two of the most powerful, potential competitors will be removed from the 
marketplace. 

In sum, while all three of the mergers reduce the number of potential competitors, 
the RBOC mergers would appear to create a threat to competition by eliminating 
from the competitive market two of the biggest potential competitors in terms of size 
and expertise in providing local telephone service. 



87 

4. Market power 

One of the most fundamental differences between the LLDS-MFS merger and the 
RBOC mergers concerns their market power. Neither MFS nor LDDS have any le- 
verage over the local telephone market or the long distance market. While MFS is 
the largest of the existing competitors for local telephone service, it has only about 
$600 million in annual revenues and is fighting to gain 1% of the market for local 
service. LDDS is the fourth largest long distance company, but it has less than 59f 
of the long distance market. 

By contrast, the RBOC's having virtually 99% of the market for local telephone 
service where they provide service, and the RBOCs on average take in about $11 
billion in annual revenues from their telephone services alone (not including their 
non-telephone business). The RBOCs are regulated both by the FCC and by their 
respective state commissions because they face so little competition that regulators 
must ensure that rates are kept at reasonable levels. 

In short, the RBOCs have monopoly, or market power for local telephone service; 
LDDS and MFS do not. This alone presents a significant difference between the 
mergers for policy-makers. There is no possibility that the merger will allow LDDS 
to raise rates for its services or to thwart competition because consumers of LDDS 
services can turn to other providers to obtain lower rates. The RBOC mergers, on 
the other hand, strengthen the companies that already have a monopoly, or market, 
power over telephone service. If the RBOC mergers are permitted, strong action by 
federal and state policy-makers, becomes even more important in order to ensure 
that consumers do not suffer from higher rates as a result of the RBOC merger. 

5. Size 

The RBOC mergers would create two enormous entities. Bell Atlantic-NYNEX 
will have over $18 billion in annual revenues; SBC will have over $21 billion. The 
two companies will be the second and third largest telecommunications firms in the 
U.S., slightly behind AT&T. Before the Bell Atlantic-NYNEX announcement, ana- 
lysts believed that the SBC-PacTel merger would be the fourth largest merger in 
the entire history of the U.S. The Bell Atlantic-NTfNEX merger is even bigger. Now 
that AT&T has divested it manufacturing and computer operations. Bell Atlantic- 
NYNEX is almost as large as AT&T. Time Warner, which will become the largest 
media company in the world once it completes its acquisition of Turner Broadcast- 
ing, Inc., will still be smaller than either of the two merged companies, as wdll TCI, 
the supposed "giant" of the cable industry. The two merged RBOC's companies will 
each be approximately twice as large as MCI and Sprint, the second and third larg- 
est long distance carriers. 

The sheer size of these new combined corporations is a concern for several rea- 
sons. First, it wdll make it more difficult for regulators to determine whether the 
company is engaging in cross-subsidization or other forms of improper cost-shifting. 
For example, one reason for breaking up AT&T in 1984 was that FCC officials testi- 
fied that AT&T was so large that they could not prevent AT&T from engaging in 
cross-subsidization to keep out competitors. 

Second, the added revenues means that the incumbent telephone companies have 
a greater potential to engage in predatory, below-cost pricing. When a monopolist 
faces the beginning of competition, a logical strategy is to lower its prices for com- 
petitive services below its costs. The monopolist may find that it is profitable to 
price certain services below cost in order to keep the competitor from growing and 
preserve its monopoly over other services. The monopolist can only afford to lose 
money on these few competitive services, however, if it is making enough money on 
its other, monopoly services to overcome the revenue shortfall from the competitive 
services. The larger the company is, the longer it can engage in such predatory pric- 
ing without suffering harm. It is also important to realize that the monopolist has 
incentives to engage in this behavior even if it is under some form of price regula- 
tion. 

6. Jurisdictional issues 

Another source of concerns about the mergers lies in the awkward Unes of juris- 
dictional authority over the companies. In general, the FCC regulates the interstate 
portion of the carrier's business, while the states regulate the intrastate operations. 
States control about 75% of the total capital investment made by the telephone com- 
panies. By involving more states in the regulatory process for each of the merged 
companies, the mergers increase the difficulty that each state commission will have 
in reviewing the activities of the new, larger company. For instance, officials in the 
14 states that must review the operations of USWest frequently note that the juris- 
dictional complexities can, as a practical matter, render regulatory review so dif- 
ficult as to be ineffective. The merger of Bell Atlantic-NYNEX in particular en- 



hances this concern because the merger will efiectively double the number of states 
that will have the jurisdiction over the new entity. 

7. Conclusion of the merger analysis 

In conclusion, the RBOC merger, if permitted to go through, would appear to pose 
significant threats to the achievement of the goal of Congress to promote competi- 
tion for local exchange telephone service. The LDDS-MFS merger, on the other 
hand, does not appear to raise the same level of concerns. 

The benefits of the RBOC mergers in terms of cost savings are speculative, and 
in any case, may not be reflected in lower rates to consumers. The effect of these 
mergers on jobs is likely to be small in relation to the growth of jobs in the commu- 
nications market as a whole. All three of the mergers remove one potential competi- 
tor in the market for local telephone service, but the two RBOC mergers each elimi- 
nate a stronger and more experienced potential competitor. The two RBOC mergers 
strengthen companies that already have market power over local telephone service, 
makes them into two of the largest corporations in the U.S. and the world, and 
makes state regulation of their activities more difficvilt. The combination of size and 
market power wdll give the merged RBOC's additional means with which to forestall 
competition with no assurance that any of the purported benefits of the mergers will 
be flowed through to consumers. 

rv. SAFEGUARDS 

For all the above reasons, CPI believes that the proposed mergers of the RBOC's 
should not be permitted to go forward unless, at a minimum, additional measures 
are taken to develop competition and protect consumers. CPI suggests that policy- 
makers should impose the following conditions before considering whether the merg- 
ers should be approved. 

a. Require each RBOC to satisfy the competitive checklist in each state in its region 
before the merger can be considered for approval 

As discussed above, the RBOC mergers are premature because they tip the bal- 
ance in favor of concentration of ownership before competition for local telephone 
service has begun to be effective. In other words, these mergers increase the risk 
that competition will not develop for local telephone service. This risk should be 
counter-balanced by measures to make competition more likely for all consumers. 

One way to restore the balance is to require the RBOC's to satisfy the checklist 
in Section 271 of the Telecommunications Act of 1996 in every state in its region 
before the merger can be considered for approval. Section 27 1 of the Telecommuni- 
cations Act requires that each RBOC must open and unbundle its network to com- 
petitors for local telephone service in a state before being allowed to provide long 
distance service in that state. The Act does not require each RBOC to satisfy the 
Section 271 checklist in each state, however; the RBOC could choose to forgo the 
opportunity for long distance entry in a state if it believes that it vdll lose more rev- 
enues as a result of opening its local market to competition than it would gain from 
providing long distance service. For instance, while NYNEX is likely to attempt to 
satisfy the Section 271 checklist right away for the State of New York, it may not 
devote the resources necessary to satisfy the checklist in New Hampshire as quickly. 
Reqviiring the RBOC's to satisfy the Section 271 checklist in every state would force 
NYNEX to satisfy the checklist in each of its seven states, and Bell Atlantic in each 
of its territories (6 states and D.C.). 

Requiring the carriers to unbundle their networks in all their states helps to pro- 
tect against several of the dangers identified earlier. For instance, it woiild not be 
as easy for the combined companies to avoid state regulation if they face competi- 
tion in all jurisdictions. Indeed, greater competition will reduce the need for state 
regulation. Similarly, it is more difficult for the carriers to price services below their 
costs in a competitive area, and make up the lost profits through higher prices in 
non-competitive markets, if every market faces potential competition. 

It is important to note that this suggestion does not involve increasing the pre- 
conditions that the RBOC's must meet before they can provide long distance service. 
The Federal legislation specifically says that the FCC may not increase or expand 
the items contained in the checklist, and this proposal does not add to these long 
distance preconditions. CPI's suggestion relates to the merger applications, not the 
long distance applications. For instance, NYTvTEX might satisfy the checklist in New 
York and be able to originate long distance service in New York but may not be 
allowed to merge with Bell Atlantic if it has not complied with the checklist in the 
other states. In the alternative, NYNEX might meet the preconditions for the merg- 
er by satisfying the Section 271 checklist in each state, but may not yet provide long 



89 

distance service if, for instance, it fails to meet the "public interest test" under the 
legislation. 

By requiring each of the four RBOC's to satisfy the Section 27 1 checklist in each 
state, the regulator would not have to make a determination of the carrier's market 
share or market power. Nor would this suggestion involve policy-makers in inter- 
preting a new set of standards. Instead, this suggestion woufd rely upon the check- 
list already included in the legislation enacted by Congress. This pre-condition 
would simply rely upon the same decision that the FCC must already make under 
the legislation. As a result, this standard would not involve any increase in adminis- 
trative resources by the FCC, by the States, by the Department of Justice, or by 
the carriers. 

Finally, the carriers themselves have announced that they plan to meet the check- 
list requirements. The RBOC's supported passage of the legislation and are plan- 
ning to comply with the checklist requirements, so the proposal would not impose 
any additional burden upon them. The pre-condition of ensuring that the RBOC's 
meet the Section 271 checklist is simply an added safeguard to ensure that the 
merged entity does its part to allow competition to develop in every state in their 
service areas. 

Requiring the RBOC's to satisfy the Section 271 checklist in each state does not 
guarantee that competition will emerge in each state. Such a requirement, however, 
might increase the likelihood that competition would develop sufficient to offset the 
dangers to competition that the merger would create. 

b. Require the RBOC to flow through to consumers any benefits received fi-om operat- 

ing efficiencies 

As noted, the mergers could make it more difficult for regulators to determine 
whether the carriers are pricing their services according to their costs. The jurisdic- 
tional questions, as well as the doubling in size of the companies, will make regula- 
tion more difficult. These problems could make it easier for the carriers to charge 
rates to consiuners that are higher than they would be otherwise. 

One way to address this potential problem is to require the carriers to reduce 
their rates according to the amount of efficiencies they can expect will occur from 
the merger. Both carriers allege that the merger will make them more efficient and 
reduce their costs. It seems reasonable that regulators should require that the bene- 
fits of these efficiencies should flow through to consumers in the form of lower rates 
for service. 

Unfortunately, it is unlikely that the carriers will flow through these savings to 
consumers unless regulators make such a cut in rates an explicit part of their ap- 
proval process. Most states have implemented some form of price cap regulation 
that does not require the prices for service to be based directly on their costs. In 
other words, if carriers reduce their costs, they do not have to lower their prices 
to consumers. Regulators must take specific action to ensure that consumers benefit 
from the cost reductions achieved by the carriers as a result of the mergers. 

c. Additional safeguards 

CPI bases these conclusions on the information concerning the mergers that is 
available at this point in time. Several regulatory agencies are reviewing these 
mergers, including the Department of Justice, the FCC, and certain state regulatory 
commissions. It is possible that further information concerning these mergers will 
arise in the course of those proceedings. CPI will monitor these investigations to de- 
termine whether additional action may or may not be necessary. 

V. CONCLUSION 

CPI understands that U.S. companies must prepare to meet the challenges of the 
21st Century. The markets for telephone services, entertainment services, computer 
services are converging. Many of these companies believe that they need to prepare 
for the fiiture by aggregating products and services so that they may provide "one- 
stop shopping" to consumers. CPI understands and is not opposed to the desire of 
companies to provide one-stop shopping and other consumer services. CPI simply 
urges this Committee and other policy-makers to make certain that consumers can 
choose from several competing providers, each of whom is able to sell services both 
individually and as part of a package. CPI believes that the goals of the Tele- 
communications Act were correct — to promote a more competitive, deregulatory 
marketplace for telecommunications goods and services. Recent developments, and 
in particular the proposed mergers between several of the RBOCs, threaten the 
achievement of those goals. Before allowing these mergers to go forward, policy- 
makers should take steps to ensure that the RBOCs take more effective steps to 
promote competition for local telephone services and to ensure that consumers bene- 



90 

fit from at least some of the cost savings that these mergers are intended to 
produce. 

Senator Thurmond. Mr. Hatfield. 

STATEMENT OF DALE N. HATFIELD 

Mr. Hatfield. Thank you, Mr. Chairman. I appreciate the oppor- 
tunity to testify before you today on the subject of mergers and 
competition in the communications industry. I have already sub- 
mitted written testimony, and in accordance with your instructions 
I will only summarize that testimony here this afternoon. 

Let me begin by stating for the record that while my firm has 
done some work for the incumbent LECs from time to time, we also 
have done quite a bit of work for long distance carriers and others 
who seek to compete in the local market. 

In my testimony here today, I will focus on two areas; one, my 
concerns about the prospects for robust competition in the provision 
of local telephone service; and, two, given those concerns, the public 
interest implications of the proposed mergers between Bell Atlantic 
and NYNEX and between SBC and PacTel. 

Over the past 25 years or so, of course, competition has been suc- 
cessfully introduced in the customer premises equipment and long 
distance portions of the communications marketplace. Competition 
in the local telephone segment, of course, was held back by a com- 
bination of factors, including legal barriers to entry and the mas- 
sive size of the initial investments required to duplicate the exist- 
ing local exchange network. Thus, despite local telephone pre- 
dictions to the contrary, the degree of local competition has re- 
mained trivial. 

In passing the Telecommunications Act of 1996, of course, this 
Congress took critical steps to facilitate the development of com- 
petition in the provision of local services. It did so by affirming the 
policy of relying upon competition in communications generally, 
and more specifically by legislating against statutory and regu- 
latory barriers to entry, by establishing the legislative groundwork 
for economical and nondiscriminatory interconnection agreements 
and, among other things, legislating against unnecessary and un- 
fair unbundling and resale restrictions. 

Recently, of course, as we have heard, the FCC took important 
steps to achieve the procompetitive goals of the act. But despite 
these critical steps by the Congress and the FCC, I continue to 
have strong reservations about whether robust competition, with 
multiple facilities-based providers of local service, will actually de- 
velop. My reservations stem from two things. 

First, I am concerned that unlike the situation in long distance 
and equipment manufacturing sectors of the market following di- 
vestiture, the Bell operating companies have a strong incentive to 
impede competition in their core market, the provision of local ex- 
change and exchange access services. 

Second, while striking down statutory and regulatory restrictions 
and eliminating or reducing other barriers to entry — while these 
are necessary conditions, they may not be sufficient to ensure the 
development of robust local competition. They may not be sufficient 
because of the enormous cost of creating multiple local communica- 



91 

tions networks and the high risks associated with gaining sufficient 
market penetration to achieve reasonable economies of scale. 

Thus, my conclusion is that, despite this Congress' commendable 
efforts to promote competition in all segments of the industry, the 
prospects for robust local competition are highly uncertain, at best. 
Because of this uncertain outlook, I believe strong legislative and 
regulatory oversight is absolutely essential to protect consumers 
and emerging competitors against the exercise of monopoly power. 

More specifically, because of the nascent, limited and fragile na- 
ture of the emerging competition, I believe the proposed mergers 
among industry giants should be given especially close scrutiny, 
lest they further entrench incumbent local providers and thwart 
the procompetitive deregulatory climate that you tried so hard to 
create. 

Against this backdrop of uncertainty about the prospects for local 
competition, I would like to turn my attention to the proposed 
mergers. Based upon my analysis of the situation, I have reached 
three fundamental conclusions regarding the mergers. 

First, I have concluded that the Bell operating companies indeed 
are best positioned to serve as pathfinders or trailblazers in the 
road to increased local competition outside their operating terri- 
tories. Second, because of their unique positions to compete outside 
their regions, and given the uncertainties regarding possible com- 
petition from other entrants, I further conclude that the proposed 
mergers will significantly diminish the prospects for future com- 
petition in the local market. 

Indeed, it was my expectation, perhaps naively, that with the 
passage of the act, the BOC's and the other incumbent local car- 
riers would aggressively expand outside their respective operating 
territories and begin to compete head to head with one another. 
The proposed mergers drive a stake in the heart of those hopes. 

Third, the reduction in the total number of BOC's with the pro- 
posed mergers will decrease the future effectiveness of both bench- 
mark regulation and benchmark competition. The present industry 
structure involving multiple BOC's facilities regulatory and com- 
petitive comparisons or benchmarking to the benefit of all consum- 
ers. 

Thus, I have concluded the proposed mergers will significantly 
diminish the prospects for local competition, as well as decrease the 
effectiveness of both benchmark regulation and benchmark com- 
petition. Hence, I strongly recommend that the Department of Jus- 
tice and the other Federal and State authorities give the proposed 
mergers the closest possible scrutiny. 

That concludes my testimony, Mr. Chairman. I would be happy 
to answer any questions you or your colleagues might have. 

[The prepared statement of Mr. Hatfield follows:] 

Prepared Statement of Dale N. Hatfield 
introduction 

Thank you Mr. Chairman. I very much appreciate the opportunity to appear be- 
fore you today to testify regarding mergers and competition in the telecommuni- 
cations industry. I have been involved in the telecommunications policy arena for 
about twenty-five years and it is from that perspective that I offer this testimony. 

It is obvious, of course, that we are not in the midst of a particularly critical pe- 
riod of time — a period of time during which actions taken in the private sector and 



92 

decisions taken in the public policy and regulatory sectors will have a profound and 
long term influence on the development and deployment of advanced telecommuni- 
cations and information technologies. More specifically, these actions and decisions 
will play a crucial role in determining whether the American public will actually 
enjoy the benefits associated with opening all telecommunications markets to com- 
petition as contemplated by the passage of the Telecommunications Act of 1996 ear- 
lier this year. 

Before I present the substance of my testimony, I thought it might be useful if 
I briefly summarized my experience in the telecommunications policy field. One of 
my earliest positions was Deputy Chief of the Office of Studies and Analysis in the 
Office of Telecommunications Policy, Executive Office of the President. From there, 
I went to the Federal Communications Commission (FCC) where I became Chief of 
the Office of Plans and Policy. After serving at the FCC, I went to the National 
Telecommunications and Information Administration (NTIA) in the U.S. Depart- 
ment of Commerce, where I became Chief of the Office of Policy Analysis and Devel- 
opment. Subsequently, I became Acting Assistant Secretary and then Deputy Assist- 
ant Secretary of Commerce for Communications and Information and Deputy Ad- 
ministrator of NTIA. I left government nearly 15 years ago and established a tele- 
communications consulting firm in Boulder, Colorado. We have grown to where we 
now employee eight full-time professionals with advanced degrees in engineering, 
economics, business, and law. 

While we have provided consulting services to incumbent local telephone compa- 
nies from time to time, the principal part of our consulting work in this area has 
been on behalf of long distance carriers and firms seeking to compete in the provi- 
sion of local telecommunications services. In addition to serving private sector cli- 
ents, I have also served as a consultant to the Department of Justice, to state gov- 
ernments, and to foreign governments regarding issues of telecommunications pol- 
icy. 

In my testimony here today, I will focus on two areas: one, my concerns about 
the state of — and prospects for — competition in the provision of local telephone serv- 
ice and, two, given those concerns, the public interest implications of the proposed 
mergers between Bell Atlantic Corporation ("Bell Atlantic") and Nynex Corporation 
("Nynex") and between SBC Communications, Inc. ("SBC") and Pacific Telesis 
Group ("PacTel"). 

PROSPECTS FOR LOCAL COMPETITION 

Over the past twenty-five years or so, competition has been successfully intro- 
duced into the customer premises equipment and long distance telecommunications 
markets. I attribute this success to three major things: (1) the striking down of legal 
prohibitions on competition in these two segments of the telecommunications mar- 
ket, (2) the lack of significant economies of scale or natural monopoly characteristics 
in either of the two segments, and (3) the divestiture of the Bell Operating Compa- 
nies from AT&T and the accompanying line-of-business restrictions that reduced the 
incentives of the divested BOCs to use their market power to discriminate against 
participants in the two segments. 

Competition in the local telephone segment of the telecommunications market has 
been held back by a combination of factors including: (1) legal barriers to entry at 
the state level, (2) the massive size of the initial investments required to duplicate 
the existing local exchange network infrastructure, (3) difficulties in gaining the 
necessary interconnection arrangements with the incumbent local exchange carriers 
and in obtaining needed rights-of-way, (4) unnecessary bundling and resale restric- 
tions imposed by the incumbent local carriers, and (5), more generally, difficulties 
in overcoming the natural monopoly characteristics of local telecommunications net- 
works. Thus, despite local telephone company predictions to the contrary, the degree 
of local competition has remained trivial. 

In passing the Telecommunications Act of 1996, this Congress took critical steps 
to facilitate the development of competition in the provision of local telecommuni- 
cations facilities and services. It did so by affirming the policy of relying upon com- 
petition in telecommunications generally and, more specifically, by legislating 
against statutory and regulatory barriers to entry, by establishing the legislative 
groundwork for economical and non-discriminatory interconnection arrangements, 
and, among other things, by legislating against unnecessary and unfair bundling 
and resale restrictions. Recently, in CC Docket No. 96-98, the Federal Communica- 
tions Commission took important first steps to achieve the pro-competitive goals of 
the 1996 Act. Despite these critical steps by the Congress and the FCC, I continue 
to have strong reservations about whether robust competition in the provision of 
local telecommunications services will actually develop. 



93 

My reservations stem from two things. First, I am concerned that, unlike the situ- 
ation in the long distance and equipment manufacturing sectors of the market fol- 
lowing divestiture, the Bell Operating Companies have a strong incentive to impede 
competition in their core market — the provision of local exchange and exchange ac- 
cess services. Indeed, given the trivial amount of local competition that exists today, 
they not only have the incentive, but they also have the power to impede competi- 
tion. Second, while striking down statutory and regulatory restrictions and eliminat- 
ing or reducing other barriers to entry are necessary, they may not be sufficient to 
ensure the development of robust local competition. They may not be sufficient be- 
cause of the enormous cost of creating multiple local telecommunications networks 
and the high risks associated with gaining sufficient market penetration to achieve 
reasonable economies of scale. 

These two conditions — the difficulties in dealing with highly entrenched incum- 
bent carriers who have a strong incentive to impede competition and the cost of ac- 
tually duplicating the existing local telecommunications network and achieving rea- 
sonable economies of scale — coupled with some remaining technological uncertain- 
ties and risks associated with alternative local exchange networks, explain in large 
part why local competition is still not developing rapidly or extensively. Moreover, 
our firm's economic modeling suggests that the incumbent local telephone compa- 
nies' cost of providing local service is substantially lower than the corresponding 
price in many geographic areas in which other providers may wish to compete. As 
a result, the incumbent local telephone companies are in a strong position to reduce 
prices when and where entry is threatened. 

In short, the required investments in alternative local exchange networks are not 
only large but highly risky as well. The magnitude of the investment and the high 
risks involved go a long way in explaining why (1) the cable industry has apparently 
pulled back from full-scale telephony deployment and is focused more on providing 
Internet access services and on expanding and protecting their core business of de- 
livering entertainment video programming, (2) the emerging wireless Personal Com- 
munications Service providers appear to be focused almost entirely upon competing 
with existing cellular mobile radio carriers rather than providing ordinary local tele- 
phone services, and (3) the competitive access providers (CAPs) still seemed focused 
on providing switched and dedicated transport services to business customers in 
limited — typically downtown — areas. In this regard, it is important not to confuse 
glowing press releases on limited market tests and premature technology "h}T)e" 
wdth firm commitments by organizations with substantial financial and technical re- 
sources to actually construct alternative networks on a ubiquitous basis. 

Thus, my conclusion is that, despite this Congress' commendable efforts to pro- 
mote competition in all segments of the telecommunication industry through pas- 
sage of the 1996 Act and the Commission's commendable first steps to develop poli- 
cies and rules to facilitate that competition, the prospects for robust local competi- 
tion are bleak at worst and highly uncertain at best. Because of this bleak, or, at 
best, uncertain outlook, I believe strong legislative and regulatory oversight is abso- 
lutely essential to protect consumers and emerging competitors against the exercise 
of monopoly power. More specifically, because of the nascent, limited, and fragile na- 
ture of the emerging competition, I believe proposed mergers among industry giants 
should be given especially close scrutiny lest they further entrench incumbent local 
providers and thwart the pro-competitive, deregulatory climate that your tried so 
hard to create. 

EFFECTS OF THE PROPOSED MERGERS 

Against this backdrop of uncertainty about the prospects for local competition, I 
would now like to turn my attention to the proposed mergers between Bell Atlantic 
and NYNEX and between SBC and PacTel. Based upon my analysis of the situation, 
I have reached three fundamental conclusions regarding the proposed mergers. 

First, I have concluded that the BOCs are especially advantaged as potential out- 
of-region competitive entrants into the local exchange and exchange access markets. 
Not only do they have the overall advantage of having operated local telephone net- 
works for decades, the BOCs, including the four that are currently planning to 
merge into two companies, have significant advantages in terms of (a) gaining ac- 
cess to the massive capital resources necessary to construct alternative networks on 
a ubiquitous basis throughout a region, (b) their knowledge of, and experience wdth, 
the technical and economic aspects of interconnection and (c) their knowledge and 
experience with billing and Operational Support Systems that are vital to the provi- 
sion of local telephone services. Therefore, the BOCs are uniquely positioned to 
serve as "pathfinders" or "trailblazers" on the trail to increased local competition 
outside their current operating territories. 



94 

Second, based upon the first conclusion, and given the entrenched position of the 
BOCs within their respective regions and the uncertainties regarding possible com- 
petition from other entrants, I further conclude that the proposed mergers will sig- 
nificantly diminish the prospects for future competition in the local exchange and 
exchange access markets. Indeed, it was my expectation — or, at least, my fervent 
hope — that, with the passage of the 1996 Act, the Bell Operating Companies and 
other incumbent local exchange carriers would expand outside their respective oper- 
ating territories and begin to compete head-to-head with one another. The proposed 
mergers drive a stake in heart of those hopes and expectations. Once consummated, 
only antitrust action would have any hope of restoring the possibility of that com- 
petition. 

Third, the reduction in the total number of BOCs through the proposed mergers 
will decrease the future effectiveness of both benchmark regulation and benchmark 
competition. Let me explain what 1 mean by these terms. While the BOCs fre- 
quently march in lock step, differences do arise in terms of, among other things, (a) 
their regulatory strategies and tactics and (b) their choice of technologies and serv- 
ices. As an example, NYNEX, in the face of regulatory pressure, showed an early 
willingness of collocate Competitive Access Provider equipment in their local central 
offices. That willingness, no matter how reluctantly produced, aided emerging CAPs 
and policy makers and regulators in other regions in establishing the technical and 
economic feasibility of collocation. 

Likewise, the BOCs have differed in terms of their choice of technology platforms 
and service offerings. For example, some BOCs have been strong proponents of the 
use of fiber optic technology to offer broadband services while others have favored 
the use of a new technology that relies upon expanded use of today's copper tech- 
nology. Still others have unveiled strategies for relying upon microwave radio tech- 
niques for delivering broadband entertainment programming. There may be good 
business reasons why the BOCs choose different technology platforms and different 
service offerings, but, given their market power, the regulator cannot be assured 
that the choices are always in the best interests of the BOCs' customers. These dif- 
ferences give policy makers and regulators, as well as interveners in regulatory pro- 
ceedings, the opportunity and factual basis with which to challenge those choices 
and to prod or cajole them to improve their perfonnance accordingly. Such chal- 
lenges can lead, for example, to more efficient forms of interconnection, better tech- 
nology choices, and wider availability of important services. 

Differences in BOC technology and service choices also produce a form of bench- 
mark or yardstick competition. For example, residential or small business subscrib- 
ers desiring economical digital connections to the Internet can put pressure on their 
local BOC to provide such services (or to provide them in a more user- friendly way), 
based upon popular or trade press accounts of the offerings and performance of 
other, out-of-region BOCs. More telling, large business or government customers 
with multiple locations and high value communications traffic, can use their experi- 
ence in one region to pressure their provider in another region to improve perform- 
ance or to offer different services. Even more to the point, with multiple regional 
BOCs, a large financial services firm can, for example, threaten to move its commu- 
nications-intense "back office" processing facility served by NYNEX in Manhattan 
to a nearby location in New Jersey served by Bell Atlantic. By this means, the cus- 
tomer can indirectly pressure the incumbent local carrier to improve performance 
or lower prices. 

SUMMARY AND CONCLUSIONS 

In summary, I have concluded, Mr. Chairman, that, despite Congressional efforts 
to promote competition in all segments of the telecommunications industry through 
passage of the 1996 Act, the prospects for robust local competition are highly uncer- 
tain at best. Because of this highly uncertain outlook, I believe strong legislative 
and regulatory oversight is absolutely essential to protect consumers and emerging 
competitors against the exercise of monopoly power by the incumbent local exchange 
carriers. 

I have also testified that ( 1 ) the BOCs are uniquely situated to act as pathfinders 
or trail blazers in introducing competition outside their current regions, and (2) the 
present industry structure involving multiple BOCs facilitates regulatory and com- 
petitive comparisons or benchmarking to the benefit of all consumers. 1 have there- 
fore concluded that the proposed mergers will significantly diminish the prospects 
for competition in the local exchange and exchange access markets as well as de- 
crease the effectiveness of both benchmark regulation and benchmark competition. 
The importance of these consequences can hardly be overstated given the uncertain 
prospects for local competition. Hence, I strongly recommend that the U.S. Depart- 



95 

ment of Justice and other federal and state authorities give the proposed mergers 
the closest possible scrutiny. 

That concludes my testimony Mr. Chairman and I would be happy to answer any 
questions you or your colleagues might have. 

Senator THURMOND. Mr. Crandall states in his written testimony 
that efficiencies from the Bell mergers, "would be reflected in lower 
rates for consumers." Could you each please state whether you be- 
lieve the Bell companies can be expected to pass the savings 
through to consumers instead of simply increasing their profits 
prior to competition developing in local telephone markets? 

Mr. Crandall. 

Mr. Crandall. Oh, you want to start with me? I thought you 
were going to ask them to criticize my point of view. Mr. Chair- 
man, it is a standard maxim and theorem in economics that even 
in a monopolistic industry, declines in costs are passed through to 
consumers. In any industry, chances are these costs would be 
passed through unless they served as some sort of a signaling de- 
vice to keep prices up. 

I think there are likely to be substantial efficiencies from a vari- 
ety of combinations. I don't think we today can know where they 
come from. As long as the mergers themselves do not reduce actual 
competition and as long as these companies are not the unique po- 
tential entrants into the other's markets — matters which, as Mr. 
Huber suggested, will be tested before antitrust authorities — there 
is no reason to stop them and we ought to just wait and see. I be- 
lieve there will be efficiencies and I do believe that under any mar- 
ket structure they will be passed through to consumers. 

Senator Thurmond. Does any other member wish to comment on 
that? Mr. Binz. 

Mr. Binz. Senator Thurmond, I would take exception with that. 
For 11 years, I was a consumer advocate in Colorado. I never saw 
a utility volunteer to pass through cost savings once. It was up to 
the regulators to do that. Now, once they are subject to competi- 
tion, I will agree that they will be forced to bring their costs down. 
I think if Mr. Crandall's prediction were true, then the Bell operat- 
ing companies who are the subject of these merger discussions 
would then agree with the proposal that CPI is making here, 
namely that they commit to reduce rates reflecting the $900 million 
annually in savings that the Bell Atlantic-NYNEX is claimed to 
generate. I do not think, however, prior to being subject to true 
competition in a region that consumers will expect to see those effi- 
ciencies flow through. 

Senator THURMOND. Mr. Huber, do you care to comment on this? 

Mr. Huber. Well, we don't completely have to speculate about 
this. Mr. Hatfield suggested that it was the 1996 Act that per- 
mitted these mergers to happen. But, of course, the 1996 Act had 
no impact whatsoever on the legality or otherwise of merging local 
phone companies, and Bell Atlantic and NYNEX did, in fact, merge 
part of their operations some time ago. They merged their cellular 
operations, and anybody who seriously studied, not just rhetorically 
chatted about that merger, will have to say that the signs there are 
pretty good. 

Now, it is correct that the cellular market is driven by larger 
competitive forces at the moment than the land-line market, but I 



96 

don't think anybody disputes that new entry is happening in the 
local land-line business, and where prices are not already below 
cost — and they won't drop any further below cost if they are al- 
ready below cost, but where that is not the case, yes, savings will 
be passed on when competitive pressure forces that. 

Senator Thurmond. Mr. Hatfield, do you care to comment on 
that? 

Mr. Hatfield. Yes. I mean, I think one of the very good reasons 
that the prices of cellular have come down, of course, is because of 
the FCC license to additional providers of cellular service right 
here in the district, and that has put competitive pressures on. 
What I am saying in my testimony is I have very serious doubts 
that certainly in the next few years we will see a lot of competitors, 
and absent those competitors, then I don't believe these sorts of ef- 
ficiency gains will be passed through to consumers. 

Senator Thurmond. Now, could each of you comment briefly on 
whether you think the telecommunications industry has received 
the clear guidance it needs to know how to position itself in the 
marketplace and invest in the new technologies, and what impact 
do you believe the appeals of the recent regulations of the Federal 
Communications Commission will have? 

We will start with Mr. Huber. 

Mr. Huber. Well, I think this is an industry that could use a lot 
less guidance from both Congress and the FCC. I would like to see 
competition providing more of the guidance and regulators less. 
The fact is Congress wrote a pretty complicated law earlier this 
year and the FCC has written even more complicated regulations 
trying to implement it and thrashing that out is going to take some 
time. It is a pity it can't be done faster, but basically we are cor- 
recting 60 years of bad regulatory policy and it will take a year or 
two to work that out. 

Senator Thurmond. Mr. Crandall. 

Mr. Crandall. Senator Thurmond, I think as I indicated in my 
oral remarks, I don't think very many people know where things 
are going to settle out in the telecommunications sector and, as a 
result, I don't think anybody could give these companies guidance. 
We are embarked upon a competitive strategy which is, in a sense, 
a grand experiment. No one else has done this in the world, with 
the possible exception of New Zealand, and they have spent 5 years 
fighting in the courts about it, so we haven't even gotten any guid- 
ance from them. 

I don't think it is possible to provide guidance in a market which 
is being opened up to competition and in which technology is 
changing so rapidly. I think these are very, very uncertain times 
for telecommunications providers and I think they have to be very 
careful as to how they move. 

Senator Thurmond. Mr. Binz. 

Mr. BiNZ. Senator Thurmond, I think the FCC faithfully inter- 
preted the statute which Congress passed. The incumbent monopo- 
lies didn't like the result they got and that is why they have gone 
to the court on appeal on this. I think the rules are sufficient and 
I think they are clear, and I think the FCC recognizes the same 
thing that Congress did, namely you can't just remove the barriers 
to competition and expect that they happen magically. You have 



97 

got to do some work to get it when you are living with a legacy 
of a very entrenched monopoly. I think the FCC's rules do that. I 
am very dismayed by the stay because I think this does put a road- 
block in the way to competition. Hopefully, the courts will not 
grant the stays and eventually the FCC will prevail in the appeals. 

Senator Thurmond. Mr. Hatfield. 

Mr. Hatfield. I think there are three major rulemakings. I be- 
lieve the Commission refers to them as the trilogy, and as Mr. Binz 
just mentioned, of course, the FCC did come out with a decision 
that is being challenged, of course, and that was in the local com- 
petition interconnection issues. But we have left, of course, the uni- 
versal service proceeding and then a very, very important access 
charge reform proceeding. Until, I think, we get all three in place, 
I think one cannot say that the rules are clear. 

Senator THURMOND. Mr. Huber, given your view of the expand- 
ing nature of telecommunications markets, do you think that every 
merger which might be proposed in the industry should be per- 
mitted? If not, where would you draw the line? 

Mr. HUBER. Well, I itemized three or four in my opening re- 
marks. I mean, clearly, we would not want Bell Atlantic to acquire 
TCI's cable property in Washington, DC. We wouldn't want Bell At- 
lantic and SBC to merge their cellular properties in Washington, 
DC. Where there is a single geographic market and truly competi- 
tive products, of course, you are not going to allow them to merge 
unless it is very small players merging to become a more viable 
competitor. 

So there is plenty of opportunity to enforce the antitrust law 
with intelligently defined product markets and geographic markets, 
but very little of our discussion today has even bothered to articu- 
late what product is competing against which product and in which 
geographic area. Until you do that, no intelligent antitrust analysis 
is possible. 

Senator Thurmond. Does any other member wish to comment on 
that? 

Mr. BiNZ. Senator Thurmond, in my written testimony I discuss 
the LDDS-MFS merger proposal, distinguishing that from the 
merger of companies with market power, like Bell Atlantic and 
NYNEX. I think there are distinctions that can be made. I think, 
arguably, creation of a vertical integration of the kind that LDDS 
and MFS are proposing may, in fact, create a more viable competi- 
tor, one who is able to go up against NYNEX in its own territory. 

However, I think the horizontal mergers, especially when you get 
into a situation like a market like New York City, which has been 
discussed here today, I think those are problematical. I know the 
Department of Justice will perform its duty in reviewing that. 

Mr. Crandall. Could I just respond to that briefly? There is very 
little in the way of horizontal issues in this case and the major 
issue is going to be over potential competition, not horizontal inte- 
gration by two competing carriers. 

Senator Thurmond. As I noted in my opening statement, merg- 
ers are illegal under the antitrust laws only if the effect may be 
to substantially lessen competition. In other words, mergers are to 
be permitted under the antitrust laws as long as the effect on com- 
petition is neutral or causes minimal harm. 



98 

Mr. Binz and Mr. Hatfield, while you clearly do not favor the two 
Bell mergers, do you believe that their effect may be to substan- 
tially lessen competition? 

Mr. BiNZ. Senator Thurmond, I think what is relatively unique 
about the situation we are talking about is we have just opened a 
market to competition, namely local exchange service. We have re- 
moved legal barriers which have been in place in some cases for 
decades. I agree with the sentiment expressed by Mr. Crandall that 
we don't know how this is going to develop. In that circumstance, 
it is very difficult perhaps to assess precisely the effect that merg- 
ers of the sorts that we are discussing here have had. 

But I think it is undeniable that there is some effect on the com- 
petitiveness of segments of this market. It needs to be investigated. 
I am not an antitrust expert and wouldn't propose to say here 
today whether that threshold which you announced has been ex- 
ceeded. I think, though, it is undeniable and I think it is frankly 
incredible to think that Bell Atlantic and NYNEX would never 
have had designs on each other's markets. That is tantamount to 
saying that no Bell is going to compete with any Bell. I think that 
needs to be examined very closely. I think the suggestion that we 
made that that be tied to the opening of their markets via imposi- 
tion of the 27 1 requirements as a pre-condition to merger is an ap- 
proach to that. 

Senator Thurmond. Mr. Hatfield. 

Mr. Hatfield. Yes. Well, these companies have had 100 years of 
experience in providing local telephone service and the thought 
that they are somehow not uniquely qualified based upon that ex- 
perience to compete with one another I just don't understand. 
Therefore, it is my conclusion that this will significantly lessen 
competition. 

Senator Thurmond. Now, would any of you care to comment on 
the view that, despite their dominant position, the Bell companies 
are not fierce competitors in the marketplace because they have 
grown complacent from years of regulation? 

Mr. Crandall. Well, I will comment on that, Senator. I men- 
tioned in my oral remarks and in the response, I guess, to Senator 
Leahy that any time a company is protected from competition and 
engaged in the regulatory process, they have some difficulty in ad- 
justing to an openly competitive world. All you have to do, I sup- 
pose, is to ask former airline executives who practice before the 
CAB how well they did once competition was opened up. 

The idea that they have some sort of unique advantage, though, 
as Mr. Hatfield suggested, in providing this service because they 
have provided it under a regulatory umbrella for many years, I 
think, may even be belied by studies that Mr. Hatfield's own orga- 
nization is making today which suggest that a new entrant could 
enter at maybe half the cost of these local exchange companies. If 
your costs today are twice the costs of what a potential entrant 
has, that is some advantage. 

Senator Thurmond. It seems that we are in an exciting period 
in which many new competitors will be entering the marketplace 
and offering new services. While this is a positive development, it 
also may lead to a certain amount of frustration and confusion 
among consumers and more marketing calls during dinner time. Do 



99 

any of you have any advice or encouragement for consumers, other 
than to grin and bear it? 

Mr. HUBER. Shop around. You will find better deals. 

Mr. Crandall. Once again, as I mentioned in my opening re- 
marks, one of the reasons for those calls, particularly from long dis- 
tance companies, is that the price/cost margin, price over the incre- 
mental cost of providing the network services, is so enormously 
high. I think once the prices come down due to competition, you 
will get fewer calls asking you to switch in return for a check of 
$50 or $100. 

Mr. BiNZ. Senator Thurmond, I would add that I think that help 
is on the way to some extent with the integration of service offer- 
ings by providers. I think that is going to be — rather than competi- 
tion for your attention for long distance and, separately, competi- 
tion for your attention for Internet supply or competition for local 
service, packaging of services is probably going to provide some re- 
lief. I just saw a study announced last week that a very high per- 
centage of people want something we have all been saying here; 
namely, one-stop shopping is preferred. I think that is one point 
that is going to help. 

The second point I would make is that the FCC, pursuant to the 
new law, is promulgating rules on the use of information collected 
about consumers for purposes of marketing other products. CPI has 
endorsed fairly restrictive conditions on which that information can 
be used, and I think if the FCC follows through on its notice of pro- 
posed rulemaking on customary proprietary network information, 
that will also curtail some of the proliferation of calling lists that 
are developed through that kind of information. 

Senator Thurmond. Mr. Hatfield. 

Mr. Hatfield. I don't have anything to add to that. 

Senator Thurmond. Now, do any of you have any further state- 
ments you would like to make before we close this hearing? Mr. 
Hatfield. 

Mr. Hatfield. Well, if I could, I think it is awfully important to 
focus on this notion that in your home in South Carolina or my 
home in Colorado, it is really realistic to think in the next few 
years, at least, that there are going to be two or three wires run 
in there by different people, or there are going to be different bay 
stations placed in my home so that I have a choice of five or six 
different local telephone companies. I just simply do not believe 
that is in the cards. Therefore, in my opinion, any notion that this 
is going to become a highly competitive local market in the short 
term is just simply not true. 

Senator Thurmond. Mr. Binz. 

Mr. Binz. Senator Thurmond, very quickly, I would just say that 
you might have the impression from the panels that preceded this 
one, with all the discussion about interconnection negotiations and 
agreements, that there is some, in some sense, rampant competi- 
tion for local services. I am here to report that that is not the case 
yet. Hopefully, it will be some day. 

Although it is a strange word to apply to these Fortune 500 com- 
panies, the word "fragile," in fact, I think the market structure that 
we need to have developed to have local competition is fairly frag- 
ile. The kinds of rules that the FCC is adopting which are intended 



100 

to create a market to create the playing field in which the market 
can grow is very important. That is why we are here today. Again, 
Senator Thurmond, I appreciate very much your calling a hearing 
to look at these issues because I think we are at a turning point 
as to whether local competition actually does proceed the way Con- 
gress hoped it would when it passed the legislation earlier this 
year. 

Senator THURMOND. Does anybody else have any statement they 
would like to make? 

Mr. HUBER. If I could just end by summarizing what I think I 
just heard to my left here, on the one hand, competition is impos- 
sible, it won't happen, there is no prospect for it whatsoever; and, 
second, the prospects for competition will be severely diminished if 
these mergers are allowed to proceed. Now, you can have one or 
the other, but you can't have both. 

Mr. Crandall. Let me just also conclude by saying that I per- 
haps agree with Mr. Hatfield that the prospects in the short term 
for someone coming in and building all new facilities, wire-based 
facilities in local markets, may not be very bright. I think they 
have been dimmed substantially by the possibility that the 
unbundling and resale requirements of the FCC are what they are 
and make it so attractive to be a reseller. 

But, also, we have to keep in mind that there is a prospect of 
wireless competition, and that is a real prospect. The fifth, or 
maybe the sixth, depending on how you are counting, entrant into 
that business collectively for a nationwide license just bid $10 bil- 
lion just for the spectrum to offer that service. Even if the present 
value of that is only $4 or $5 billion, that is a huge amount to pay 
for the right to enter as the fifth or sixth competitor offering wire- 
less service against the wire-line companies. I think we are going 
to see real wireless competition before very long for the wire-line 
companies. 

Senator THURMOND. Mr. Hatfield. 

Mr. Hatfield. Could I just add a thought to that, though? In my 
looking at what the so-called PCS providers are actually offering, 
essentially it is up-banded cellular. It is essentially to compete with 
the cellular carriers. As far as I know, there has been almost no- 
body that is really proposing a true wireless local loop that replaces 
in a fixed sense. It is more to compete with the cellular carriers. 
So, therefore, the prospects for true wireless local loop competition, 
again, I think are a long way off. 

Senator Thurmond. We will leave the record open for 1 week for 
members to submit statements. Additionally, members may have 
written follow-up questions for the witnesses. 

I wish to express my deep appreciation to all of you witnesses 
who have testified here today. I think your presence here and your 
testimony has been very helpful to this committee. 

Now, if there is nothing further, we stand adjourned. 

[Whereupon, at 5:12 p.m., the committee was adjourned.] 



APPENDIX 



Questions and Answers 



Response of James R. Young to Question From the Senate Committee on the 

Judiciary 

Question. What impact will your merger have on consumers? What impact will 
your merger have on your ability to compete in international markets? In the long 
distance market? 

Answer. I believe that the merger will be good news for consumers, as it will bring 
them new and better services at competitive prices. 

The new Bell Atlantic wdll be large in absolute size, but small in comparison to 
the telecommunications giants of the world. Individual companies such as AT&T 
Nippon Telephone and Telegraph and Deutsche Telekom are all larger than the 
merged company will be. Even after AT&T's divestiture, it will be twice as large 
as the new Bell Atlantic. These international giants are also teaming up into global 
alliances like the AT&T World Partners, MCI's and British Telecom's Concert, and 
Global One of Sprint, France Telecom and Deutsche Telekom. 

The location of the new Bell Atlantic, serving both the political and financial cap- 
itals of the United States, makes the company a natural challenger to these multi- 
national powerhouses. Bell Atlantic and NYNEX customers make about 35 percent 
of the international calls from the United States, and we want to be able to begin 
to provide competition for these customer's business. 

The new Bell Atlantic will be a good competitor at home. We intend to fulfill the 
promise of the Act by bringing competition to the domestic long distance market 
that has been dominated by AT&T, MCI and Sprint. We expect that the combined 
Bell Atlantic/NYNEX will be a better competitor than either company could have 
been on its own. 



Responses of James R. Young to Questions From Senator Thurmond 

Question 1. Mr. Young and Mr. Ellis, many commentators seem to view the two 
pending Bell mergers as identical. Would either of you care to address differences 
between the two mergers in light of the various competition issues which have been 
raised? 

Answer 1. I believe that the two mergers are the same in terms of the competition 
issues. In both cases, the proposed merger partners do not compete with each other 
today. Other than perhaps in their entering the national long distance market place, 
dominated today by the Big Three long distance companies, they had no plans to 
compete against each other in any market in the future. 

Question 2. Mr. Ebbers, to what extent do you consider the merger between 
WorldCom and MFS to be "defensive" or compelled by changes such as the Bell 
mergers? Do you think that larger telecommunications companies will enhance com- 
petition and create greater efficiencies for the benefit of consumers? 

Answer 2. Not applicable. 

Question 3. Mr. Ebbers, do you expect MFS ever to begin offering service to resi- 
dential customers, rather than simply to business customers? How do you respond 
to assertions that targeting beg customers first is "cream skimming"? 

Answer 3. Not applicable. 

Question 4. Mr. Ellis and Mr. Young, how soon do your companies and your merg- 
er partners expect to be able to offer inter-LATA long distance service in every state 
in your regions? 

(101) 



102 

Answer 4. Both Bell Atlantic and NYNEX individually, and the new merged Bell 
Atlantic, plan to meet the competitive checklist as soon as possible and promptly 
thereafter to file applications with the FCC for permission to provide in-region long 
distance service. At this point, we expect to begin filing these applications early next 
year. 

Question 5. Mr. Ellis and Mr. Young, when do you expect widespread local ex- 
change competition for business and residential customers to occur in your regions? 

Answer 5. The exact timing of widespread competition, especially competition in 
the residence segment of the market, is in the hands of the competitors, such as 
Mr. Ebbers' company. Because of the rate structures established under existing reg- 
ulatory regimes, I would expect to see broad competition for business customers be- 
fore comparable competition in the residence sector. 

Many firms are entering the local telephone business. In New York, there are al- 
ready nearly 50 exchange carriers certified to do business. There are somewhat 
fewer in Northern New Jersey, and there are significant numbers in Boston, Phila- 
delphia, Pittsburgh, Washington, D.C., and Baltimore. These competitors include 
the likes of AT&T, MCI, Time Warner and MFS. Even SBC has said that it intends 
to compete in our territory, as it already has a presence there. 

Question 6. Mr. Young, you indicate in your written testimony that New York City 
is one of the most intensely competitive telecommunications markets, with over 
twenty local exchange and access service providers. Could you give us some indica- 
tion of what share of the local exchange market those companies currently hold? 

Answer 6. NYNEX has no way of knowing what share of the local market the 
competitive local exchange service providers serve. Looking at some of the data that 
are available pubUcly, the following information gives a good indication of the state 
of competition in New York City and Manhattan: 

There are nearly 50 competitive local exchange carriers certified by the New York 
Public Service Commission to provide local exchange service. There are also an addi- 
tional 23 wireless service providers licensed to provide local exchange service. 

There are 11 competitive local exchange switches operating in the New York City 
market. These switches have an estimated capacity of 1.3 million lines. 

Based on one market survey, NYNEX had 46.5% of the high capacity DS 1 and 
DS 3 service circuits in Manhattan and 54.3% in New York City. NYNEX's share 
of the slower speed DS circuits is 61.2%. 

NYNEX has assigned 710,000 telephone numbers, or 71 NXX codes, to competi- 
tive carriers serving New York City. 

Competitive carriers have located 45 physical collocation nodes in NYNEX New 
York City central offices, with an additional 27 currently under construction. 

New local carriers generated more than 300 million inbound/outbound minutes of 
local calls in a recent month in the greater New York metropolitan area, and that 
number is growing at more than 10% per month. 

Question 7. Mr. Young and Mr. Ellis, I am told that some Bell companies have 
negotiated discounts of well over 50% to resell long distance service. Have your com- 
panies obtained steep discounts in purchasing long distance for resale, and if so, 
was it advantageous to be able to negotiate with more than one company? 

Answer 7. Bell Atlantic has an agreement with Sprint to resell Sprint's long dis- 
tance service. Under that agreement. Bell Atlantic is not at liberty to disclose the 
price it pays for the Sprint service without Sprint's prior written consent, but I be- 
lieve that the price we got is competitive with the price that Sprint gives to other 
customers. One of the benefits of a competitive market is that buyers have a choice 
of sellers and can negotiate with them to get the best possible deal. 

Mr. Ebbers, I am also interested in your views on this subject. 

Question 8. Mr. Ellis, you state in your written testimony that basic rates for long 
distance service have risen, but the long distance companies assert that long dis- 
tance prices have dropped by more than half Can you reconcile these contrary 
claims? Do discount packages and analysis of different time periods account for the 
full diff'erence? 

Answer 8. Not applicable. 

Question 9. Mr. Young and Mr. Ellis, do you see your mergers as having any com- 
petitive impact on the ability of equipment manufacturers to sell to your companies 
in the future? Do you see your mergers as diverting management or capital re- 
sources and slowing investment in infrasture improvements? 

Answer 9. I do not foresee that our merger will have any effect on the ability of 
equipment manufacturers to sell to Bell Atlantic. 

In order to compete in the market that the Telecommunications Act has produced. 
Bell Atlantic must offer new services and improve the ones that it now offers. Im- 
proving our infrastructure is one of ways that we can do this. Management will be 



103 

focused on these efforts and will be expending capital resources whether or not the 
merger takes place. 

Question 10. When the CEOs of Bell Atlantic NYNEX came to my office to discuss 
the need for their merger, they stressed that the combined company would be only 
a fraction of the size of the German and Japanese telephone companies. Could you 
each please give your perspective on competition with foreign companies, the likeli- 
hood of foreign competitors offering local exchange service in this country, and the 
need for American companies to become larger in order to meet foreign competition? 

Answer 10. The telecommunications marketplace is becoming increasingly inter- 
national in scope and is dominated by giant corporations and alliances. Individual 
companies such as AT&T, Nippon Telephone and Telegraph and Deutsche Telekom 
are all larger than the merged company will be. Even after AT&T's divestiture, it 
will be twice as large as the new Bell Atlantic. These international giants are also 
teaming up into global alliances like the AT&T-lead World Partners, MCI's and 
British Telecom's Concert, and Global One of Sprint, France Telecom and Deutsche 
Telekom. These arrangements are not merely ephemeral alliances that will come 
and go. British Telecom has invested $4.3 billion in MCI in return for a 20 percent 
stake in the company, an ownership interest comparable to what France Telecom 
and Deutsche Telekom received in exchange for their $3.7 billion investment in 
Sprint. These foreign concerns, through their interests in MCI and Sprint, are ac- 
tively entering local telecommunications markets. In order to remain competitive, 
American companies must come close to matching the scope, efficiency and buying 
power of these firms. 



Responses of James R. Young to Questions From Senator Le.vhy 

Question 1. A draft released last month by the Vermont Department of Public 
Service, states that the NYNEX-Bell Atlantic merger is expected to reduce operating 
expenses for NYNEX by about 5 percent. A press release issued jointly by Bell At- 
lantic and NYNEX estimated approximately $600 million in annual, recurring ex- 
pense savings by the third year following the merger. That $600 million in annual, 
recurring expense savings by the third year follovdng the merger. That $600 million 
was said to consist of approximately $300 million from reduction of 3,000 corporate 
and administrative management positions. 

Question A. Do you stand by those estimates? 

Question B. In a recent filing before the Vermont regulatory authorities, NYNEX 
indicated the good news that "no union represented employee will be laid off as a 
result of the merger." On the other hand, NYNEX indicated that about 1,500 redun- 
dant management positions from within NYNEX will be eliminated. How many of 
these positions will be eliminated in Vermont? 

Question C. From what specific sources do you expect cost savings resulting from 
the merger to arise if there will be no loss of union jobs and only minimal loss of 
management jobs? 

Question D. Will these reduced operating expenses be passed along to Vermont 
ratepayers, and if so, how soon can Vermont ratepayers see these savings? 

Question E. How much of those cost savings are related to the core local telephone 
businesses, as opposed to other businesses such as cellular and foreign ventures? 

Question F. Will competitive pressures be sufficient to assure that consumers 
enjoy a reasonable share of those cost savings? 

Answer A. Yes. 

Answer B. We have not gotten far enough into our merger integration planning 
to be able to answer this question. 

Answer C. First, I want to make it clear that we are not talking about firing 3,000 
employees. What we are talking about is eliminating 3,000 positions, while finding 
other positions for many of the people now in those slots. This will make our exist- 
ing operation more efficient and free up valuable human resources for jobs in grow- 
ing segments of our business. 

Moreover, we expect that the merged Bell Atlantic will be able to achieve a vari- 
ety of other cost savings. For example, the combined companies should be able to 
qualify for larger volume discounts from suppliers. 

Answer D. The cost savings associated with the elimination of the 1500 positions 
will be allocated to its Vermont operations according to the company's usual cost 
allocation procedures. The extent to which these cost savings are ultimately re- 
flected in prices will depend on many factors, including the overall financial per- 
formance of the business, the competitive environment and competitive pressure on 
prices existing at the time. 



104 

The greater efficiencies that are accrued as a result of the proposed merger will 
assist the post-merger corporation in holding down cost pressures and in responding 
to competitive pressures. Competition, not regulation, will drive rates in the future. 

Answer E. We are not far enough along in planning the post-merger organization 
to be able to answer in any detail. However, because our cellular companies merged 
some time ago and because our foreign enterprises are relatively small, we would 
expect that most of the savings would come in the telephone exchange, toll and re- 
lated areas of the business. 

Answer F. Yes. 

Question 2. Some press reports have suggested the job cuts resulting from the 
NYNEX-Bell Atlantic merger are being understated. Bell Atlantic has fewer workers 
per access line than NYNEX. Apparently, NYNEX would have to lose about 10,000 
jobs to get down to Bell Atlantic's worker to line ratio. Do you anticipate efforts in 
a merged company to reduce NYNEX's worker to line ratio? If so, would that mean 
any job losses in Vermont? 

Answer 2. We do not have any plans of this sort. However, the merged company, 
just like the two companies if they do not merge, will continue to strive to become 
more efficient in ways that will make it more competitive in the marketplace. 

Question 3. In the early 1990's NYNEX in Vermont went through a period of 
downsizing its workforce. This trend seems to have turned around this year and I, 
obviously, would like to see this growth trend continue. What effect do you antici- 
pate the merger will have, if any, on continuing job growth with NYNEX in Ver- 
mont? 

Answer 3. Over the long term, I expect that the merged company's workforce in 
Vermont will grow as the company expands its offerings to its Vermont customers. 
The merged company will flourish in the global marketplace, and our employee base 
will grow as well. 

Question 4. In your testimony, you indicated Bell Atlantic's "intent to fulfill the 
promise of the Act by bringing competition to the domestic long-distance market." 
By merging with NYNEX, Bell Atlantic has delayed its ability to offer long-distance 
in the current NYNEX region. 

Question A. Will the mergers in fact delay your entering the long-distance market 
in the new combined regions? 

Question B. How will the merger help Bell Atlantic and NYNEX better compete 
in the long distance market? 

Answers A and B. Both Bell Atlantic and NYNEX are each working hard to com- 
ply with the Telecommunications Act's competitive checklist, and we expect to be 
ready to file applications to enter the interLATA business in our states early next 
year. 

The domestic long distance market today is dominated by the Big Three carriers, 
AT&T, MCI and Sprint. Even after its divestiture, AT&T will be twice the size of 
the merged Bell Atlantic-NYNEX combination. MCI and Sprint are partly owned 
and funded by foreign telecommunications giants, British Telecom, France Telecom 
and Deutsche Telekom. We will need all the human and technical resources of the 
new Bell Atlantic to compete with these firms. 

Question 5. Bell Atlantic and NYNEX reportedly plan to resell Sprint long-dis- 
tance service outside their collective territories. 

Question A. Is this report correct? 

Question B. When do you expect to reach agreement with Sprint? 

Question C. When do you expect to begin offering long-distance service over the 
Sprint network? 

Question D. How does the NYNEX-Bell Atlantic merger affect the agreement with 
Sprint? 

Answers A, B, and C. Both Bell Atlantic and NYNEX individually entered into 
contracts with Sprint that allow them to resell Sprint long distance service. Bell At- 
lantic has been authorized to provide long distance service in Michigan, Texas, 
North Carolina, South Carolina, Illinois, Ohio, Oregon, Florida, Iowa, Montana, 
Tennessee, and Utah, while NYNEX has been authorized in California, Colorado, 
Florida, Hawaii, Idaho, Indiana, Iowa, Illinois, Kentucky, Michigan, Montana, Ne- 
braska, North Dakota, Oregon, Texas, Washington, Wisconsin and Wyoming. 

Answer D. The terms of these arrangements are confidential, and Bell Atlantic 
cannot disclose them without Sprint's prior written approval. 

Question 6. Vermont has not yet adopted price cap regulation, but has a proceed- 
ing ongoing to consider doing so. To ensure that ratepayers enjoy the benefits of cost 
savings from the mergers, should regulators insist that those savings be passed 
along to ratepayers, particularly in those States with price cap regulation? If not, 
could you explain why? 



105 

Answer 6. Price regulation establishes incentives for companies to be more effi- 
cient, while protecting customers against price increases to basic services. As such, 
under price caps, the company would not expect to seek a rate increase for transi- 
tion and integration costs associated with the merger, nor would it expect rate de- 
creases expressly to account for potential future benefits from the merger. Ulti- 
mately, it will be the market that will pass on any savings that the company 
achieves. 

Question 7. Bell Atlantic has announced plans to "rebalance" rates in Pennsylva- 
nia, despite the rate freeze that Bell Atlantic agreed to there just a few years ago. 
The result of the rate change that Bell Atlantic is proposing would lower urban and 
suburban rates while raise rates in rural areas. 

Question A. If the merger with NYNEX goes through, will you urge a similar "re- 
balancing" of rates in the rest of the combined Bell Atlantic-NTNEX region? 

Question B. In the event Bell Atlantic's proposed "rebalancing plan" is adopted in 
Pennsylvania, how much do you estimate the rates in rural areas will rise? 

Question C. If the same "rebalancing plan" proposed by Bell Atlantic in Penn- 
sylvania were proposed for Vermont using the same criteria for urban, suburban 
and rural areas, how would telephone rates be affected in each area? 

Answers A, B, and C. Under existing tariffs in Pennsylvania, Bell Atlantic resi- 
dence service customers in rural areas pay less for basic telephone service than cus- 
tomers in Philadelphia and Pittsburgh, even though the cost to provide that service 
is higher in rural areas. Although the proposed rate rebalancing plan would raise 
rural customers' raters, these consumers would still pay less than customers in the 
big cities. 

We have no plans to propose similar rebalancing in Vermont. There are discus- 
sions underway with the Vermont Department of Public Service to develop a price 
cap proposal that we would expect to last for the next few years. There are no plans 
or proposals for geographic deaveraging of rates in those discussions. No estimates 
exist that apply the Pennsylvania proposal to rates in Vermont. 

Question S. Will the Bell Atlantic-NTNEX merger affect the timing of the NYNEX 
offering video programming in Vermont and, if so, how? 

Answer 8. There are at present no specific plans for offering video programming 
in Vermont. To the extent that the new Bell Atlantic believes there is a market op- 
portunity for video programming in Vermont and that the Vermont market justifies 
the significant investments required for that business, then it is possible that the 
merger could facilitate its introduction. 

Question 9. I understand that NYNEX and Bell Atlantic have no fewer than 25 
different "Joint Merger Teams" focused on how to meld the companies together. At 
the same time, potential new entrants in the local market need the attention of 
these two companies focused on satisfying contractual and regulatory requirements 
on interconnection and unbundling. 

Question A. What assurance can you give that the merger will not interfere in 
any way with complying with these new requirements? 

Question B. If a potential new entrant ordered 10,000 local loops tomorrow, how 
long would it take NYNEX or Bell Atlantic to fill the order? 

Answer A. We must comply with these new requirements if we are to get into 
the interLATA business in our territory. This, without more, will ensure our speedy 
compliance. Moreover, interconnection negotiations and arbitrations are governed by 
strict schedules prescribed in the Telecommunications Act, which ensure that issues 
will be resolved in a timely fashion. 

Answer B. A local loop is a facility dedicated to an individual customer that runs 
from the telephone company office to the customer's location. I have a loop running 
to my home, separate from the two going to my next door neighbor and the 15 to 
the school across the street. A new entrant will not order an unbundled loop to an 
existing subscriber unless it has made a sale to the customer at the end of the loop. 

The time it will take to provide an unbundled loop, or a number of unbundled 
loops, will depend on the complexity of the request — for example, whether the 
10,000 loops represent a single large customer in a single central office or are scat- 
tered throughout multiple central offices, and whether additional steps, such as con- 
ditioning, must be taken to provide loops with the capabilities requested by the new 
entrant. For this reason, it is not possible to give a single, answer to the question. 
Bell Atlantic and NYNEX will negotiate the installation intervals for unbundled 
loops with the new entrant based on the complexity of the request, and if no agree- 
ment can be reached, then arbitrators in each State will make determinations con- 
sistent with the Telecommunications Act. 

Question 10. Some analysts have urged that the mergers between Regional Bell 
Operating Companies be approved only after the companies have met the "competi- 
tive checklist" contained in the Telecommunications Act of 1996 for each of the 
states in which they operate today. This would not guarantee but would certainly 



106 

help assure that resources continue to be directed first to opening up the local loop 
and then to the merger. 

Question A. Since both NYNEX and Bell Atlantic presumably intend to comply 
with the competitive checklist, what objection, if any, do the companies have to this 
proposal? 

Question B. If the Bell Companies were required to meet the "competitive check- 
list" before the pending mergers are approved, would the timing of the mergers be 
delayed? If so, for how long do you estimate the mergers would be delayed? 

Answers A and B. The proposal is completely illogical and unnecessary. 

First, the competitive checklist of section 271 of the Communications Act is part 
of the test for Bell company entry into the interLATA business in the areas in which 
they currently provide local exchange service. It has nothing to do with a Bell com- 
pany's entry into the local exchange business in a different area, whether by merg- 
ing wdth the incumbent or othervirise. The antitrust laws prescribe the standard for 
preventing this merger — whether it will substantially lessen competition in some 
line of commerce. 

Second, companies like Bell Atlantic and NYNEX already have a powerful incen- 
tive to comply with the competitive checklist because they cannot get into the long 
distance business until they do so. 

At this point, we expect to be in compliance with the checklist early next year. 
Although harder to predict, we also expect to receive the regulatory approvals we 
need for the merger in that same time period. 

Question 11. Consumers want to know what this merger will mean for their qual- 
ity of service, things like repair intervals, customer trouble reports and missed serv- 
ice appointments. On this score, NYNEX has been required to pay $4.1 million in 
rebates to customers in New York because of poor service quality. The New York 
Public Service Commission found that service quality was worse on every level com- 
pared to the prior year. Competition forces rivals to provide better service. With the 
merger, NYNEX customers will be denied the opportunity for improved service that 
would follow if Bell Atlantic had entered as a competitor instead of as a new owner. 
How will the merger with Bell Atlantic give NYNEX customers in New York, as 
well as Vermont, better service than if Bell Atlantic had entered the local phone 
service market as a competitor? 

Answer 11. Bell Atlantic is neither an actual or potential competitor for local tele- 
phone service in Vermont. Bell Atlantic has no network facilities in Vermont with 
which to supply services. There are other telecommunications firms that already 
have network facilities, customers and brand recognition in Vermont, and these 
firms are much more likely to enter the Vermont telecommunications market than 
in Bell Atlantic, NYNEX and Bell Atlantic believe that customer service will be im- 
proved in Vermont and elsewhere under the new Bell Atlantic. The merged company 
will unite the skiUs, talents and know-how of researchers, network engineers, man- 
agers and other employees now working separately in each of the two merging com- 
panies. Each compan/s "best practices" will be transferred to the other and benefit 
the customers of both. 

Question 12. Bigness seems to be a major justification for the Bell Company merg- 
ers. Both NYNEX and Bell Atlantic have said that being bigger will allow them to 
exploit economies. Taken to its logical extreme, if bigger is better, a combination of 
all the Bell Companies would be even better. What is it about these two particular 
companies that make their merger in the public interest of Vermont and the other 
States in the combined region? 

Answer 12. This merger combines two corporations that currently serve two adja- 
cent, but distinct, parts of the northeast corridor from Maine to Virginia. The com- 
bined territory is one of the most communications-intensive regions in the world, 
and one of the most competitive. The merger will create a company better able to 
compete with companies like AT&T and MCI, with lower unit costs and greater effi- 
ciencies. 



Responses of James R. Young to Questions From Senator Feingold 

Question 1. Obviously, Bell Atlantic/NYNEX would not be merging if there were 
not sufficient cost efficiencies to be gained. I saw in your press materials at the time 
of the merger announcement that the Bell Atlantic/NYNEX merger will result in 
cash savings of $900 million a year. 

Question A. How much of the expected $900 million in cash savings do you expect 
to pass on to consumers? Please provide estimates as to how much consumer prices 
will come down relative to c\irrent levels as a result of these mergers. 



107 

Question B. How specifically will those cost savings be passed down to consumers 
in your service region? Please provide a time line for the projected price reductions 
and identify the lines of service for which you expect the greatest price reduction. 

Answers A and B. Competition is the best tool to ensure that consumers benefit 
from efficiencies and cost savings. As local telephone companies hke those owned 
by Bell Atlantic and NYNEX are freed from the restrictions of rate regulation by 
the states and the FCC, they will have the flexibility to be more price competitive 
and have the ability to pass these and other savings on to their customers. 

Question 2. Some of the biggest concerns for new entrants into local service in- 
clude both the terms of the interconnection agreement as well as the quality of the 
service provided to the entrant for the network elements they are reselling. I know 
that some of the new entrants to local markets and some of your existing coinpeti- 
tors are very concerned about both the ability and the willingness of the RBOCs to 
properly provide service, maintenance and interconnection during the merger transi- 
tion period. 

Question A. What assurances can you provide customers and competitors that the 
quality of your service will not be affected during the merger transition period? 

Question B. If you believe service to those businesses with which you have inter- 
connection agreements will not be affected by the merger, why do you oppose tying 
approval of the merger to a requirement that service to those competitors be no 
worse than prior to the merger as suggested by Mr. Atkinson from Teleport? 

Answers A and B. Telephone companies like those affiliated with Bell Atlantic 
and NYNEX are already under strict non-discrimination obligations, which assure 
that the quality of service they provide to Teleport is at least as high as those com- 
panies provide to themselves and their own customers. However, nothing in the 
Communications Act requires or authorizes what Teleport has asked for — the estab- 
lishment of mandatory service performance standards and penalties for failures to 
meet such standards — and the FCC has declined to do so. 

Bell Atlantic has committed to provide service to Teleport at levels that meet or 
exceed Bell Atlantic's average network performance levels and to provide Teleport 
with performance reports generated in the ordinary course of business. As long as 
Teleport, or any other competitor, receives service that is comparable to that which 
Bell Atlantic provides to itself and its customers, the interests of a fair competitive 
marketplace are satisfied. 

Since the date of the hearing, Bell Atlantic has voluntarily reached agreement 
with Teleport on a set of quality and performance measurements that Bell Atlantic 
will provide to allow Teleport to determine whether the service Bell Atlantic pro- 
vides Teleport is on parity with the service Bell Atlantic provides to itself and oth- 



Response of James D. Ellis to Question From Senate Committee on the 

Judiciary 

SBC Communications Inc., 

September 18, 1996. 

Hon. Patrick J. Leahy, 
U.S. Senate, 
Washington, DC. 

Dear Senator Leahy: On September 11, 1996, I testified at a hearing before the 
Senate Judiciary Committee on "Mergers and Competition in the Telecommuni- 
cations Industry." During that hearing, you asked a series of questions concerning 
the issue of Bell companies competing with one another. Your inquiry focused on 
the issue of whether or not the Bell companies intended to compete with one an- 
other in the local exchange marketplace. In response to your questions, a difference 
of opinion arose between Bernard J. Ebbers, President and Chief Executive Officer 
of LDDS WorldCom and me over the facts on this issue. You invited us to supple- 
ment the record in order to correct this discrepancy. 

BACKGROUND 

Dviring the hearing, you observed that number of long distance companies and 
local access providers have sought interconnection with the incumbent Bell compa- 
nies to bring some competition to the local exchange. You suggested that the Bell 
companies can do the same thing, but have not. You paraphrased and quoted, in 
part, from Mr. Ebbers' written testimony which stated that despite their expertise 
in the provision of local phone service, "not one of the Bell's applications to offer 
service in an out of region state requests certification as a local carrier." See Written 



108 

Testimony of Bernard J. Ebbers at p. 2. You then asked Mr. Ebbers if that was a 
"fair" reading of his written testimony. Mr. Ebbers acknowledged that your charac- 
terization of his written testimony was "fair." You then asked if it was correct that 
no Bell company has filed to provide service as a local carrier outside their own 
service territory. I responded that this was not correct, and indicated that SBC had 
filed in Illinois and New York. Mr. Ebbers disagreed with me, and stated that SBC 
had really filed to be a long-distance carrier in those states. I reaffirmed that SBC 
had filed to obtain a certificate to provide local exchange telephone service in Illinois 
and New York, and went on to describe SBC's strategic plan to compete out-of-re- 
gion where it has network facilities, brand name recognition, and a customer base. 

THE FACTS 

SBC, through its subsidiaries, has filed applications for and has obtained certifi- 
cates of authority to provide both local exchange and interexchange services in Illi- 
nois and New York. 

In Illinois, SBMS Illinois Services, Inc., an indirectly wholly owned subsidiary of 
SBC, was granted a Certificate Of Interexchange Service Authority "to provide 
interexchange telecommunications services within MSA-1," a Certificate of Service 
Authority "to provide and resell local exchange and intraMSA interexchange tele- 
communications services in those portions of MSA-1, served by Illinois Bell Tele- 
phone Company and Central Telephone Company," and a Certificate Of Exchange 
Service Authority "to provide facilities-based exchange telecommunications services 
in those portions of MSA-1 served by Illinois Bell Telephone Company and Central 
Telephone Company" on December 20, 1995. (Emphasis added.) A copy of the Order 
from the Illinois Commerce Commission granting SBC this authority is attached 
hereto. 

In New York, SBMS New York Services, Inc., also an indirectly wholly owned sub- 
sidiary of SBC, was granted a Certificate Of Public Convenience and Necessity "to 
provide point-to-point, switched and non-switched intercity and intracity tele- 
communications service and to resell all forms of telephone service in the State of 
New York" on October 25, 1995. (Emphasis added.) The order granting this certifi- 
cate noted that SBMS New York Services, Inc. petitioned to provide "residential and 
business local exchange service." A copy of the Order Issuing Certificate Of Public 
Convenience and Necessity from the New York Public Service Commission granting 
SBC this authority is attached hereto. 

If you or any members of the Committee have any further questions concerning 
this issue, or any other matter raised during the hearing, please do not hesitate to 
contact me. 

Respectfully yours, 

J.D. Ellis. 

[Editor's note: The above mentioned attachments are located in Committee 
files.] 



Responses of LDDS WorldCom to Senators' Questions 

Question 1. I understand that the most lucrative segments of the local exchange 
market are the urban and commercial markets. What percentage of your local ex- 
change revenue do you anticipate getting from these markets? 

Answer 1. While the term "most lucrative" can mean the most profitable, we un- 
derstand the question to mean the services with the highest comparative prices, 
when viewed against residential service. It must be remembered that that rate 
structure was developed between the incumbent local exchange carrier and Public 
Service Commission through proceedings designed to subsidize basic local residen- 
tial rates. The practice of charging higher rates to commercial customers for essen- 
tially the same service was developed as a by product of the expansion of the avail- 
ability of telecommunications service throughout the United States. The Bell System 
started in major metropolitan area, city to city, and added residential service along 
the way. LDDS WorldCom will commence entry into the local exchange market in 
the same way that ILECs did over the past one hundred years: provide service to 
commercial customers to support build out and investment, add residential service 
as the network will allow. 

The issue is not strictly an urban, suburban issue. WorldCom's entry strategy into 
the long distance market was to serve customers in urban and rural areas. While 
local service network build out logically might occur in business areas, today the 
term business area includes commercial investment that is being made in what was 
once considered a rural area. 



109 

If the term "most lucrative" was meant to address the most profitable segment 
of local service, the predicate for the question is plainly wrong. The most profitable 
segments of the local exchange market would be the ancillary services, e.g., CLASS 
and Caller ID services, that are offered primarily to residential customers. 

With that said, over the short term WorldCom expects to obtain over 95% of its 
local revenues from commercial markets. There are other carriers that have indi- 
cated they will be entering to serve residential markets at the outset, e.g., AT&T, 
MCI, TCG, and others. Moreover, service v^ill continue to be available form the in- 
cumbent local exchange carrier. Note, however, that WorldCom includes in its defi- 
nition of commercial markets the carrier customers that do provide service to resi- 
dential customers. Accordingly, WorldCom's network is being used to provide resi- 
dential services. 

Question 2. You have testified that your company relies on the Bells' existing net- 
works in the local exchange markets. Is this true even where MFS already has an 
existing network? Could you explain why? 

Answer 2. As the question implies the answer is yes. 

Local service entry on a facilities basis is a building-by-building connection proc- 
ess. In order to serve customers that are not presently connected to the MFS net- 
work, at a minimum, we will have to rely upon the facilities of the incumbent car- 
rier for connection to the customer premises. In certain areas customers may have 
diverse office locations, including home offices or telecommuting facilities. In one 
area we may have facilities, in others we may not. The customer may want service 
from one provider for all services at all locations. Without using the incumbent local 
exchange carrier, including the Bell Operating Companies, we would be foreclosed 
from the market. 

Question 3. How much of an advantage do you think an incumbent local exchange 
provider would have in the long distance market due to customer loyalty and/or 
preference for so called-one stop shopping? 

Answer 3. The question is hard to answer because different customer types have 
different perceptions and incentives to adopt one stop shopping, and may or may 
not have customer loyalty. For example, one incvimbent local exchange carrier may 
have a great relationship with its customers, other may have the monopolist tag 
that has created a ground swell to leave that carrier. 

The advantage the incumbent local provider has it is primarily focused on the fact 
that the customer has never tried a different local phone company. Therefore, any- 
one competing with the incumbent must provide service equal to or better than the 
incumbent. By contrast, many customers are already comfortable about switching 
long distance carriers. They are aware that it does not affect the quality of their 
essential local service. Note that almost every single IXCs customer obtains local 
service from the incumbent. For the most part, the customer is satisfied with the 
local service and is dealing with a known entity. Local service more than long dis- 
tance service is a critical service to the end user. If long distance service is disrupted 
on one carrier's network, customers either know, or are advised as to, how to dial 
another carrier's network to handle calls during the outage. Customers view local 
service differently. So the advantage goes to the incumbent at the outset. 

Preference for one-stop shopping is a function of what services will be included 
in the package of services. LEC addition of long distance service, as a technical mat- 
ter, is just an extension of their existing intraLATA long distance services. The 
ILEC presently has the full array of local services. It just needs to add the phrase 
long distance and international services to its advertising and collateral sales mate- 
rial. The story the other way is much different. 

Facilities-based competitive local exchange carriers appear to be in a similar posi- 
tion to the ILEC for the customers they are able to serve over their own facilities. 
However, where they must rely upon the incumbent LEC for underlying service, 
they are at the mercy of the incumbent's pricing practices for services made avail- 
able for resale, or, if they are using unbundled elements, the features and functions 
that are included with the unbundled element and the administrative processing 
procedure to obtain them. Few incumbent LECs have demonstrated a desire to meet 
on the competitor's terms the needs of the competitors in provisioning the wholesale 
products. The combination of control over the service, its prices and provisioning dis- 
tinguishes the Incumbent LEC advantage from the IXC advantage. 

Don't you think it works both ways — that is, wouldn't an incumbent long distance 
provider have an advantage in the local market due to customer loyalty and/or pref- 
erence for one-stop shopping? 

No, see above. 

Question 4. Sen. Feingold: MFS and WorldCom have had to rely on the RBOCs 
for at least some degree of interconnection to achieve the market penetration you 
currently enjoy. What concerns do you have in terms of MFS's interconnection 



110 

agreements with the BOCs with respect to the merger of SBC/PacTel and Bell At- 
lantic/NYNEX? 

Answer 4. The primary concern is in the implementation of the interconnection 
agreements. In a traditional marketplace client/vendor relationship, the vendor is 
seeking to accommodate the client's desires as to service quality and delivery time- 
table. The shifting regulatory/legal sands in our industry, coupled with an incum- 
bent's absence of desire to provide the wholesale service or interconnection in the 
first place, gives the RBOCs the ability to waffle and twist and turn on each issue. 
There is no wholesale competitor to which a BOC risks losing material portions of 
this new business over the next several years. By merging with a powerful potential 
competitor, the incumbent retains its position in these markets, and the potential 
competitor has gained the incumbent's advantage in the new territory. Both incum- 
bent's revenues are protected in the merger process. While the competitive entrants 
now face a stronger, more formidable opponent. 

Question 5. Sen. Thurmond: Mr. Ebbers, to what extent do you consider the merg- 
er between WorldCom and MFS to be "defensive" or compelled by changes such as 
the Bell mergers? Do you think that larger telecommunications companies will en- 
hance competition and create greater efficiencies for the benefit of consumers? 

Answer 5. Size will enable carriers to generate resources to provide additional 
services and employ more advanced technology, that should lead to consumer bene- 
fit. Is there a point where size becomes a non-factor, or can a carrier reach a point 
of being so big that being bigger has little or no meaning? Can carriers be of such 
size that they can act without fear in trampling out competition? Probably, but it 
is not an issue for a company with less than a 59c market snare. 

The WorldCom/MFS merger is an offensive move to take advantage of the market 
opportunities presented by the changing environment and retain customer base, 
while attempting to achieve the capabilities of carriers such as Bell Atlantic/NYNEX 
and SBC/PacTel. The merger is driven by many factors in the marketplace: the 
changing regulatory environment, the ability to provide a combination of services, 
the need to rely upon the monopolist competitors facilities, the reluctance of the in- 
cumbents to give carriers what was being requested, etc. 

Question 6. Mr. Ebbers, do you expect MFS ever to begin offering service to resi- 
dential customers, rather than simply to business customers? How do you respond 
to assertions that targeting big customers first is "cream skimming"? 

Answer 6. WorldCom would direct the questioner to the first response. We're not 
sure what "cream skimming" means. 

Does it mean that MFS WorldCom will introduce services that are only high mar- 
gin services? As noted that is where the Bell's focus today. The advertising for their 
services that I'm aware of is targeted to those services that have margins in the 
range of hundreds and thousands of percent. 

Does it mean that MFS WorldCom will confine its service areas to the service 
areas that are most populated? We probably will, but isn't that what the Bells do 
today? Isn't that why we have so many independent telcos, because the Bell compa- 
nies didn't want to serve those areas? 

Does it mean that by first addressing the business community MFS WorldCom 
will be able to generate sufficient funds to deploy its network to serve all types of 
customers that its facilities pass? Isn't that how the Bell's did it? (Not to mention 
MCI and Sprint.) And, given the costs involved, even after those substantial Bell 
resources were deployed they couldn't handle the expansion to more remote areas. 
The regulators had to contribute to the effort through the use of universal service 
funds and other subsidies. 

Does it mean that MFS WorldCom will enter the market in a manner that good 
business judgment dictates? Then the answer is we will, just as the Bell System did. 

Question 7. Mr. Young and Mr. Ellis, I am told that some Bell companies have 
negotiated discounts of well over 50% to resell long distance service. Have your com- 
panies obtained steep discounts in purchasing long distance for resale, and if so, 
was it advantageous to be able to negotiate with more than one company? 

Answer 7. Mr. Ebbers, I am also interested in your views on this subject. 

From WorldCom's point of view, the Bell companies were such good prospects that 
the IXC wholesale carriers sought to offer attractive prices that would win their 
business. That is a competitive environment. The effectiveness of the ability to nego- 
tiate in a competitive environment is demonstrated by (1) the BOCs ability to de- 
mand the terms, including rates, under which the services were to be provided, (2) 
the discounts achieved, and (3) the willingness of the carrier to accommodate the 
BOCs desire. Those wholesale carriers wanted the BOCs business. The BOCs ability 
to address common objectives and combine together in negotiations further en- 
hanced their negotiating posture. The market incentive are not the same when en- 
trants are negotiating with an entrenched monopolist. 



Ill 

Responses of Robert C. Atkinson To Questions From Senator Hatch 

Question 1. Can you tell me exactly why you believe that the Bell mergers will 
make competitive access providers more dependent on Bell service? 

Answer 1. The concern I expressed in the hearing is that an RBOC merger may 
cause the quality of the competitive interconnections provided by the resulting "Big 
Bell" to deteriorate, at least in the near- term. Competitive local exchange carriers 
(CLECs) depend on these interconnections (i.e., unbundled loops, completion of calls 
to the Big Bell's subscribers) to provide their competitive services. Therefore, a dete- 
rioration of the Big Bell's interconnection quality immediately impairs the quality 
of the CLECs customers, who hold the CLEC accountable for the total quality of 
the service. 

However, I do not believe that a merger changes CLECs' dependency on Bell serv- 
ices. For the foreseeable future, every competitive local carrier will be dependent on 
the faciUties and services of the incumbent local exchange carrier (ILEC), whether 
the ILEC is a small "independent" telephone company, a giant GTE "independent," 
a current RBOC, or a "Big Bell" resulting from an RBOC merger. 

Question 2. As you recognized, section 251 of the Telecommunications Act already 
requires incumbent local exchange carriers to provide interconnection at least equal 
in quality to that provided by the local exchange carrier itself I think Congress has 
already expressed its intent with regard to interconnection performance standards. 
Is it consistent with this intent for additional performance standards to be imposed 
through a consent decree? 

Answer 2. Yes. 

TCG's proposal is simply that, at a minimum, a consent decree condition must re- 
quire the "Big Bell" to maintain the status quo with respect to the quality of inter- 
connection with competitors. In my opinion, maintaining the status quo is not an 
"additional" performance standard and, more importantly, such a condition would 
be fiilly consistent with Congressional intent that Sec. 251(c) establish critical com- 
petitive safeguards. 

In particular, I believe that Congress intended Sec. 251(c)(2)(C) to be a competi- 
tive safeguard to protect competitors, who are utterly dependent on interconnection 
with the ILEC, from a number of anticompetitive abuses which have characterized 
"interconnection" since the earliest days of the telephone industry. I also believe 
that Congress expected ILEC performance to generally increase as a result of new 
technology and the prospect of competition so that Congress expected that Sec. 
251(c)(2)(C), as a competitive safeguard, would provide CLECs with a flexible, evolv- 
ing and improving standard of interconnection quality. ^ By contrast, since tying a 
competitor to a deteriorating quality of interconnection would not be an effective 
competitive safequard, I doubt that Congress intended that a competitive safeguard 
could have this perverse result. 

My conclusion, therefore, is that Congress expected interconnection quaUty to be 
generally improving and not deteriorating and enacted Sec. 251(c)(2)(C) with this 
expectation in mind. A consent decree condition that merely requires the status quo 
would be perfectly consistent with such Congressional expectation and intent. In- 
deed, a consent decree condition that required steady improvement of the ILEC's 
interconnection quality would also be consistent with this Congressional expecta- 
tions and I would hope that the Department of Justice would seek such a more 
stringent and pro-competitive condition. 



Responses of Robert C. Atkinson to Questions From Senator Thurmond 

Question 1. As I indicated in my opening statement, I am interested in your views 
about how competition in local exchange and long distance services may develop 
over the next few years, and particularly your estimates of the number of likely 
competitors with substantial shares of those markets. Would each of you please 
comment. 

THE CLEC industry CURRENTLY 

Answer 1. I have attached to this response a report entitled "Local Telecommuni- 
cations Market Shares" published in July 1996 by New Paradigm Resources Group. 
New Paradigm and a predecessor research organization have been following the de- 



' I suppose that one could argue that Sec. 251(c)(2)(C) fixes the quality standard at the level 
which existed as of the date of enactment. If this were thee case, I would agree that a consent 
decree condition requiring the status quo would not be necessary. 



177 


0.4 


540 


10.6 


76 


0.28 


264 


1.8 



112 

velopment of the competitive local telecommunications industry for a number of 
years. New Paradigm's conclusion (pp 10-11) is; 

"While CLECs continue to grow at healthy rates, the total telecommunications 
market also continues its upward growth. Therefore, CLEC market share has not 
increased enough so that an argument can be made that meaningful competition ex- 
ists. * * * Market share, in this instance, can be used as an indicator of the 'fragil- 
ity of the nascent competition. 

"CLEC market share has increased for all component of the local telecommuni- 
cations market, but it still remains minuscule when compared to the revenues and 
market shares of the RHCs." 

The report demonstrates that CLECs had the following revenues and shares of 
the sectors of the local telecommunications market in 1995. 

$ Million Share {%) 

Local exchange service 

Dedicated access 

Switched access 

IntraLATAToll 

With respect to the above table, I would observe that it took the CAP/CLEC in- 
dustry 10 years to collectively achieve the 10.6 percent share of the "dedicated ac- 
cess" market sector. 

TELEPORT COMMUNICATIONS GROUP CURRENTLY 

I believe that Teleport Communications Group (TCG) is the nation's largest facili- 
ties-based competitive local exchange carrier (CLEC). Our nationwide revenues (all 
from local telecommunications services) for the first six months of 1996 were ap- 
proximately $123 million and it is estimated that the "local telecommunications" 
market was about $50 billion for the same six months. On a revenue basis, there- 
fore, TCG's share of market was about 0.25 percent. From this, it is fair to say that 
effective local exchange competition does not exist nationally. 

THE FUTURE 

Wall Street analysts have projected that TCG's local exchange service revenues 
will grow at a compound rate of 40-50 percent over the next ten years ( to the year 
2005), resulting in annual revenues in the range of $3.5 to $4.0 billion. 

These analysts also project that the entire local exchange market will be worth 
$145-150 billion by 2005, implying that TCG's share of the revenue will be in the 
range of only 2.3-2.7 percent. The implication is that TCG will not have a "substan- 
tial" share of the local exchange market (i.e., in excess of 10 percent), even after 
growing 40-50 percent for ten years. 

Will other carriers be able to capture a "significant" share of the local exchange 
market? 

The legislative history of the Telecommunications Act reflects an expectation by 
the Congress that the cable television industry may become a significant competitor 
of the ILECs because the cable companies have extensive, ubiquitous facilities that 
pass an estimated 90 percent of the homes in this country. Cable television compa- 
nies have significant ownership interests in TCG and TCG is working with some 
cable television companies to trail the technologies that will be required to make 
cable television systems capable of carrying basic telephone calls. 1 am optimistic 
that these trials will be successful and that the cable television systems will be 
transformed, over time, into systems that are capable of competing with the ILEC 
networks. However, because this transformation will take considerable time and 
considerable investment, I doubt that any facilities-based competitor will have cap- 
tured a "significant" share of the market (i.e., more than 10 percent) by the turn 
of the century. 

However, some carriers may have a substantial revenue stream from the resale 
of ILECs services. But, as I mentioned in the hearing, "resale" of ILECs services 
does not constitute the kind of competition that provides consumers with a safe- 
guard against monopolistic abuses. Indeed, "resellers" are effectively sales agents of 
the ILECs, not competitors. 

My ultimate conclusion is that a majority of business customers and most residen- 
tial consumers will not have an effective choice of facilities-based local exchange car- 
riers for the rest of this century. 



113 

Question 2. Mr. Salsbury and Mr. Atkinson, what percentage of the local exchange 
market do your companies expect to achieve in the future? What are your projec- 
tions for the next three to five years? 

Answer 2. Please see my response to question one, above. 

Question 3. Mr. Atkinson, you indicated in your written testimony that Teleport 
is the Nation's leading competitive local exchange carrier. How do your local ex- 
change service revenues compare to the local exchange revenues of the Bell compa- 
nies or GTE? 

Answer 3. As explained in my response to question one, above, I estimate that 
TCG currently has approximately a 0.25 percent share of the total local tele- 
communications market. 

Question 4. Please state your view of the assertion that, despite their dominant 
position, the Bell companies are not fierce competitors in the marketplace because 
they have grown complacent from years of regulation. 

Ariswer 4. I totally disagree with this assertion because the Bell companies aren't 
really regulated and they aren't complacent. 

Today, most of TCG's retail (non-carrier) revenues come from "large business" or- 
ganizations. This "large business" sector of the local telecommunications market has 
been virtually deregulated in most States for many years. For example, most States 
have deregulated private line, Centrex and PBX services or allow ILECs to file "In- 
dividual Case Basis" tariffs that are customized for each customer and are not cost- 
justified. Where they have been deregulated, the ILECs are generally aggressive 
competitors, particularly with respect to prices. 

Of course, since the vast majority of the ILECs revenues are NOT currently sub- 
ject to any competitive threats, the ILECs' aggressive pricing in the small "competi- 
tive" niches is financed by over-pricing — with "regulatory^' acquiescence — the monop- 
olized services and over-charging captive consumers. 



Responses of Robert C. Atkinson to Questions From Senator Feingold 

Question 1. Some competitive local exchange carriers have suggested that it is 
very difficult to achieve resolution with FCC and state regulators of performance 
and service complaints on interconnection agreements. What system would you es- 
tablish to address resolution of service and performance complaints? 

Answer 1. TCG is particularly concerned about the inability of traditionally regu- 
latory process to address and resolve performance and service quaUty problems as- 
sociated with CLEC-ILEC interconnection. This concern is based on years of actual, 
real-world experience of being interconnected with ILECs, getting mediocre to awful 
performance from the ILEC and being unable to obtain any timely, effective rehef 
from the FCC or State PUCs. 

The chief reason that the regulators have been unable to resolve the performance 
and service problems in a timely fashion is that the ILECs are masters at "gaming" 
the regulatory process. 

Sec. 251(c)(2XC) of the Telecommunications Act requires ILECs to provide inter- 
connection which is at least equal in quality to the interconnection that they provide 
to themselves, affiliates and other carriers. This requirement implies some sort of 
regular quality reporting by the ILECs since this duty would be meaningless and 
unenforceable without comparative data. Assuming that comparative quality data is 
regularly available, CLECs would be able to seek damages and possibly injunctive 
relief based on "unequal" quahty. 

In some interconnections negotiations with some RBOCs, TCG has obtained 
agreement on "hquidated damages" so that TCG would obtain some immediate com- 
pensation in the event of a serious performance failure by the RBOC. Such liq- 
uidated damages avoid the expensive and time consuming effort of seeking damages 
through regulatory or judicial process. To be effective, liquidated damages must be 
substantial so as to discourage wilful noncompliance. 

In the absence of a liquidated damages agreement, TCG would recommend some 
sort of alternative dispute resolution (ADR) process to resolve quality and perform- 
ance problems, rather than conventional regulatory proceedings. 

Question 2. Mr. Barr, representing GTE, commented that one reason to be uncon- 
cerned about the proposed RBOC mergers is that the "local bottleneck has been 
opened up wide." 

I know your company has interconnection agreements with a number of the 
RBOCs and is offering local service in a number of urban markets. I also under- 
stand that your company has also asked a number of states to arbitrate or mediate 
interconnection agreements. Would you comment on how wide open the bottleneck 
is based on your experience as a local service provider? 



114 

Answer 2. Mr. Barr's assertion is quite laughable. 

There are two real "local bottlenecks" that constrain the development of effective 
local exchange competition, and neither are "wide open": the physical connection be- 
tween consumers' premises and a CLECs network (i.e., a "loop bottleneck"); and, 
the termination of traffic carried by a CLEC to an ILEC's customer (i.e., a "call com- 
pletion bottleneck"). 

THE LOOP BOTTLENECK 

With respect to the "loop bottleneck," CLECs such as TCG would prefer to 
NEVER rely on ILEC unbundled loops for this critical path because it is simply un- 
acceptable to be so reliant on a powerful competitor that has a 100-year history of 
abusing its control of this essential facility. Unfortunately, CLECs are forced to rely 
on unbundled ILEC loops for a number of reasons. 

One of the most pernicious reasons that CLECs are forced to rely on their ILEC 
competitors is landlord's discriminatory demands for outrageous payments from 
CLECs. In fact, some commercial and residential landlords simply refuse to allow 
CLECs to install their cables and equipment on their premises, making it physically 
impossible for the CLEC to have direct access to customers. In other cases, the land- 
lords demand such high pajmients for allowing CLECs to access their tenants that 
the CLEC is economically prohibited from direct access. This problem is generally 
compounded by discrimination resulting from the ILEC's undue bargaining leverage 
based on their historic monopoly: ILECs rarely pay landlords to access their tenants 
because the ILECs refuse to provide service under such circumstances and landlords 
would find it impossible to rent their premises without basic telephone service. 

Technological developments, such as telephony over cable television facilities and 
"wireless" loops may substantially reduce the "loop bottleneck" at some point in the 
future. But additional technological developments and substantial risk capital in- 
vestments are necessary and the cost for the new technology must fall dramatically 
before they can be considered an operational and economic substitute for the ILEC's 
ubiquitous loop networks. Therefore, today and for the immediate near-term, there 
is no practical alternative to the ILEC loop for access to the vast majority of tele- 
phone consumers and the "loop bottleneck" continues. 

It is also important to understand that the Telecommunications Act has had no 
practical impact on reducing the "loop bottleneck". The rates for unbundled loops 
and the collocation arrangements that are needed by CLECs to use unbundled loops 
are uncertain at best and generally too high. As a result of the 8th Circuit's Stay 
of the FCC's Interconnection Order, the uncertainty is likely to continue for the fore- 
seeable future. 

But even pricing unbundled loops "correctly" won't change the "loop bottleneck" 
substantially. The point of my testimony before the Committee was that ILEC per- 
formance in providing unbundled loops is equally, it not more, important than the 
simple price of the unbundled loop, "rhis is because the cost to a CLEC — in terms 
of direct out-of-pocket cost as well as the substantial costs associated with establish- 
ing and maintaining a good reputation with customers — of a missed installation 
date of an unbundled loops or frequent service problems with an unbundled loop are 
almost incalculable. We have seen no substantial improvement in ILEC performance 
with respect to unbundled loops and, if an5rthing, performance is deteriorating. 

THE CALL COMPLETION BOTTLENECK 

After a CLEC gets a customer on its network, it must be able to deliver that cus- 
tomer's call to any other telephone, particularly to the ILEC's subscribers. Unlike 
the "loop bottleneck", there is no foreseeable technological or other solution to the 
"call completion bottleneck": CLECs' will be permanently and unavoidably depend- 
ent on ILECs for call completion, forever. Congress recognized the unique and per- 
manent nature of the "call completion bottleneck" when it established special pric- 
ing rules for "Transport and Termination". See, Sec. 252(d)(2). These pricing rules 
will result in Transport and Termination (i.e., call completion) being priced at the 
absolute lowest possible level of the "reasonable approximation of the additional 
costs" incurred by the ILEC to terminate the CLECs traffic. 

Contrary to Mr. Barr's assertion, the "call completion bottleneck" not only isn't 
"wide open", it probably never will be. Consequently, this bottleneck requires sub- 
stantial and strong regulation, probably forever. 

Question 3. One of the issues associated with these mergers, particularly with re- 
spect to the Bell Atlantic/NYNEX proposal, is whether the RBOCs with adjacent 
markets would have had a natural competitive advantage if they chose to compete 
with their neighbor. Consumer groups have suggested that as a result of some of 
the joint ventures, such as Bell Atlantic/NYNEX Mobile, the joint cellular business 



115 

operated by the two BOCs, name recognition would be high and competitive oppor- 
tunities would exist. 

In Mr. Barr's testimony, he suggested that neighboring LECs do not have a com- 
petitive advantage over other new entrants into local service. 

As a competitor for local service, do you agree with that conclusion? Would MCI 
and TCG be concerned if, in one of their local service markets, the neighboring local 
exchange carrier chose to enter that market? 

Answer 3. I disagree with Mr. Barr's conclusion. 

One of the major costs associated with becoming an effective competitive local ex- 
change carrier is "brand recognition". In major markets, brand-recognition advertis- 
ing could cost tens of thousands (and possibly hundreds of thousands) of dollars per 
day, every day, for years. Mass media advertising isn't precise: radio, television and 
newspaper ads for one LEG are often viewed outside that carrier's actual service 
territory. This is particularly the case in the New York City metropolitan area: 
NYNEX's advertising is seen by many Bell Atlantic subscribers and vice versa. 
Similarly, in California, Texas, Washington State and Florida, GTE service terri- 
tories about RBOC service areas and GTE and the RBOC each have "name recogni- 
tion" outside their traditional service areas as the result of advertising to their tra- 
ditional customers. 

The "free" advertising and name recognition enjoyed by ILECs in areas adjacent 
to their traditional service areas gives them a substantial competitive advantage 
vis-a-vis "start up" CLECs when it comes to consumers selecting a CLEC. Of course, 
interexchange carriers that employ mass media marketing have the same name rec- 
ognition advantage vis-a-vis "start up" CLECs as the adjacent ILECs. 

[Editor's note: New Paradigm Resources Group, Inc.'s Research Report on: Com- 
petitive Telecommunication, dated July 1996, is located in committee files.] 



116 



Page 8 September 1996 

But Implementation Will Be Deviled By The Details 

Despite all indications that the major regulatory milestones will be met, 
businesses expecting an all-out competitive war soon thereafter will be 
disappointed. The technical details and process of tearing down the iron cunain 
surrounding the local monopoly will impede instant market opening. 

■ Users will grow a beard waiting to switch carriers. Local carrier 
switches cannot handle a boatload of orders for call forwarding 
arrangements - the interim solution for number ponability - 
especially if those requests pile in monthly from firms with hundreds of 
lines. True number portability, in which phone numbers can be 
rehomed to any carrier, will require a massive overhaul of every 
carriers' signaling network and won't begin until 1998. 

■ Endless glitches — like lost orders — will be really frustrating. 

Ordering local service today kicks off a bevy of events, like feature 
setup, installation scheduling, and direaory assistance listing. But 
when the responsibiUty is split between the incumbent and its 
competitor, botched intercompany communications and manual 
processes wUl snarl up even the simplest service requests. 

■ Inctunbents will appeal to the courts. Eager to delay competition 

in their home regions, some local telcos wall ask the court to overturn 
the FCC. While these challenges will get heard and slowdown the 
opening of markets, we believe they v«ll not massively reverse the tidal 
wave of change already unleashed by Congress. 

■ Competitors will resist cooperation. Businesses that try to mix and 

match AT&Ts Call Prompter with Bell Adantic's Toll Free service will 
get "no" for an answer. Why? Neither player will want to share 
business vAxh the other which The Act doesn't require. Advanced 
services like Web hosting, call center routing, and network 
management will remain off-limits for one-stop shopping. 

• Workers will stress out on the job. Layoffs are already rippling 
through the telco ranks. More are sure to follow. Disgrunried 
employees will rebel against the shakeout by slowdng down work 
orders, going on strike, or forcing politicians to erect new barriers by 
second-guessing regulators. 



Reproduction Prohibited Copyright 1996. Forrester Research. Inc 



117 



September 1996 



Page 



New Access 
Technolojnes 



38Ghz 

microwave 

Inverse 
multiplexing 



/*! 



Key facts 

■ Bypasses ceico landline TIs 

■ Great for path diversity 

■ Limited by line-of-sight 

' Multiple T I s made into large 

chunks of conuguous bandwidth 
' Speeds between I S and 45 Mbps 
' Needs matching equipment at 
customer and carrier sites 



■ Smashes voice, video, and data bits 
together for bandwidth economies 

> Runs best at DS3 speed 

■ Expensive, complex, unproven 



' "Digital subscriber line" reuses 
existing copper wires 

■ IS to 6 Mbps carrier service 

■ Many incompatible versions 

■ Immature equipment market 



Availability and price 

• Start-up vendors: 
ART. BizTel. WinStar 

■ About 20% less than 
landline TIs 

■ Leading equipment vendors: 
ADC Kentrox. Digital Link. 
Larse. Venlink 

• Regular monthly cost 'or 
Tl plus $8,000 per box 

■ In early deployment by 
RBOCs. GTE. and 
competitors 

• About 20% more than 
regular circuits 

■ Currently in trial at 
Ameritech. Pacific Bell. 
and U S West 

• Prices still hazy 

($50 to $ 1 .000/month) 



Source: Forrester Research, Inc. 

Quality and timeliness will drop like a stone. Lacking systems 
depth to handle their new role as wholesalers, local telcos will 
misplace orders and transfigure customer data as competitors pump 
thousands of requests into their systems monthly. Compounding the 
pain, continued layoffs will thin the ranks of experienced technicians 
and stress those still employed. Evidence of RBOC quality degradation 
is already apparent -- witness the recent multimillion dollar fines 
against NY^fEX and U S West for failure to meet regulators' goals. 

Local loop demand will outstrip supply. As carriers acquire more 
traffic types from each customer site, the break-even for higher-speed 
dedicated access lines wiU be more easily met. Plus, as businesses 
increasingly use wide area networks to reach out to customers, 
demand for Internet access wall soar (see the August, 1996 Telecom 
Strategies Report, "Sizing Internet Services"). But local telco plant 
upgrades will not keep pace with the surge. 



Copyright 1 996. Forrester Research, Int 



Reproduction Prohibited 



118 



RESPONSES 

BY 

PETER W. HUBER 

Senior Fellow, Manhattan Institute 

Responses Submitted October 16, 1996 

Hearing on "Mergers and Competition in the 

Telecommunications Industry" 

Senate Judiciary Committee 

Chairman: Senator Orrin G. Hatch 

September 11, 1996 



Senator Hatch's Questions 

1. The most notable market trend during the next five years 
will be the bundling of all telecommunications services into a 
single package. By the year 2001, four or five companies will be 
selling one-stop, integrated, end-to-end phone service to end users 
in most major markets. AT&T, MCI, and Sprint will leverage their 
existing long-distance facilities and large customer bases by 
bundling down from their national long-distance networks into the 
heart of the local exchange, using both wireline and wireless 
technology. Every major wireless entity will be allied in some way 
with a favored long distance carrier, if only as a reseller. Every 
major long distance carrier will be linked in some way to a 
wireless carrier, either as an equity owner of facilities or as a 
reseller. Vertical integration will be the dominant trend in 
markets for information services and video too. 

2 . Past experience gives us some indication of how quickly 
markets are likely to grow. Output in markets for long-distance 
and wireless service, and for customer premises equipment, grew 
very rapidly after those markets were opened to competition. In 
long-distance, for example, AT&T's revenues and profits over the 
last decade have remained relatively stable, even as AT&T's market 
share has declined. 

I believe there is little real possibility of the telecom 
industry growing more concentrated in the next few years. Even 
allowing for mergers, either already announced or that we can 
plausibly anticipate. 

3. Telecom markets are going global. All major players in 
the industry are forging international alliances with very large 
players from abroad -- British Telecom, Deutsche Telecom, France 
Telecom, Canadian companies, and others. The Bell Atlantic/NYNEX 
and SBC/Pactel mergers will create entities that are capable of 
forming international alliances comparable to the ones already 
being built by AT&T, MCI, Sprint, and their partners from abroad. 
Figure 1 . 



119 



Figure 1 

International Alliances 




AT&T Sprint-FT 

WorldPartners DBT 



Bell Atlantic/ 
NYNEX 



4. The most likely competitors in the local exchange are 
those companies that already have facilities and a large customer 
base. These are primarily Competitive Access Providers (CAPs) , 
cable companies and the largest long-distance carriers. Market 
analysts have stressed the importance of the "in-the-ground local 
networks (we call them 'desperately sought assets') to the success 
of the competitive local exchange carriers (CLECs)"' MPS, a lead- 
ing CAP, has concluded that its local networks are "the right 
assets, at the right place, at the right time."^ Cable companies 
have been described as "[t]he most obvious facility-based competi- 
tor [s]" in the local exchange due in part to their "extensive and 
relatively modern infrastructure of fiber optic and coaxial cable 



' Reingold, D., et al, Merrill Lynch, Aug. 6, 1996, Rept. No 
1770668. Merrill Lynch had earlier stated that "[i]t is clear that 
those potential local competitors who have more network facilities 
deeper into the network and who have to only lease commodity 
transmission from the Bells are clearly more likely to obtain a 
higher margin on their local business. Grubman, J.B., et al, 
Salomon Bros. Jan. 1, 1996 Rept. No. 1679303. 

^ MPS 1995 Annual Report (1996) p. 15. 

- 2 - 



120 



in place."' Bob Allen, AT&T's CEO, explained how his company could 
quickly enter the local exchange as a facilities-based competitor: 
"Currently, a substantial number of the lines serving customers 
from AT&T's digital switching centers are directly connected to 
business customers' offices. . AT&T need only make software 
adjustments and establish links to local switches in order to allow 
these direct connections -- now used only for long distance --to 
handle local traffic as well."* 

Many analysts, including market participants themselves, 
recognize that these national companies also possess marketing 
advantages over smaller, regional carriers. In its Annual Report, 
Sprint pointed to the advantages that the "national scope of the 
Sprint brand" gave it in the emerging marketplace.' Perhaps 
uniquely, AT&T benefits both from current and historical advertis- 
ing; surveys have consistently shown that anywhere between 3 and 
60 percent of the people in the U.S. still think AT&T is their 
local phone company.' A recent Yankee Group study found that 
almost 50 percent of the respondents said if they could get local 
and long distance service from the same carrier, they would select 
AT&T. Nobody else had more than a 6 percent share.'' Robert Allen, 
AT&T's CEO, has predicted that his company "can win at least a 
third of [the local] market over the next 5 to 10 years."' In my 
view, these predictions are well within the realm of possibility. 

An examination of state CLEC certifications confirms the 
importance of facilities, the ability to offer service bundles and 
an established user base. CAPs, with their in-place local 
networks, account for nearly 30 percent of the companies seeking 
local competitor status. Long-distance companies, which are 



' Robert A. Beizer and Emried D. Cole, Jr., When Local 
Exchange Competition Calls: A Survey of Competitive Local Exchange 
Access Issues. 

' AT&T News Release, AT&T's Allen Outlines Plans to Enter 
Local Telephone Market, Feb. 8, 1996. 

' Sprint 1995 Annual Report, Pg 5. 

' Joseph P. Nacchio, Executive Vice President, Consumer and 
Small Business Division. Keeping the Customers Satisfied, speech 
before the Morgan Stanley Conference, New York, NY, Feb. 13, 1996. 
(http: //www. at t .com/news/speeches/96/960213 . jna.html) . 

' Joseph P. Nacchio, Executive Vice President, Consumer and 
Small Business Division. Keeping the Customers Satisfied, speech 
before the Morgan Stanley Conference, New York, NY, Feb. 13, 1996. 
(http: //www. at t .com/news/speeches/96/960213 . jna.html) . 

' Robert E. Allen, Chairman and CEO, AT&T, Remarks delivered 
at a news conference, Washington, D.C., February 8, 1996 (As 
prepared for delivery) , http://www.att.com/news/speeches/96/960208. 
raa . html . 

- 3 - 



121 



expected to bundle their existing offerings with their planned 
local services, make up roughly 20 percent of the companies seeking 
competitive entry. As a group, long-distance companies are 
ambitious in their geographic reach, accounting for nearly 30 
percent of state certifications with the four national facilities- 
based carriers' accounting for over half of all long-distance 
carrier CLEC certifications.'" Nearly 15 percent of new competitors 
are either cable or wireless companies. Tables 1 and 2. 



Table 1 1 


CLEC/CAP Con^anies 1 


Core Business 


Number 


Percent 


CAP 


61 


29.5 


Long Distance 


44 


21.3 


Wireless 


16 


7.7 


Cable 


13 


6.3 


LEC 


8 


3.9 


Other 


65 


31.4 


Total 


207 






Table 2 


CLEC/CAP Certifications 


Core Business of 
Provider 


Number 


Percent 


CAP 


279 


41.2 


Long Distance 


198 


29.2 


wireless 


51 


7.5 


Cable 


54 


8.0 


LEC 


12 


1.8 


Other 


83 


12.3 


Total 


677 





AT&T, MCI, Sprint, and LDDS WorldCom. 



" AT&T has received, or is seeking, CLEC status in all 50 
states . 



122 



Senator Thurmond 's Questions 

1. I generally concur with the predictions made by long- 
distance carriers, CAPs, and cable concerns, about the prospects 
for local exchange competition. (See my earlier answers given in 
response to Senator Hatch.) 

As to whether or not it is "certain" that robust competition 
will develop: No, nothing is ever certain in any free market, least 
of all a market in which technology is changing so quickly. But 
competition has increased and prospered in every other telecom 
market that has been opened to competition -- customer-premises 
equipment, central-office equipment, inside wiring, long-distance, 
wireless, on-line services, and so forth. I do not believe that the 
local exchange will be the one market in which competition fails. 

2. As I indicated earlier, in response to Senator Hatch, the 
most notable trend during the next few years will be the bundling 
of previously separate services. Large, vertically integrated 
providers will serve the industry's main segments. 

3. The final answer to this question depends not on what 
Bell Companies do or don't do, but on regulators. I would hope 
that Bell Companies not only meet the checklist but also succeed in 
persuading regulators and the courts that they have done so, within 
the next two years . But given the languid pace of regulatory 
review and legal challenges, delays are possible. 



- 5 



123 



Senator Leahy's Questions 

1. The 1996 Telecommunications Act contains provisions that 
specifically address the interplay between the antitrust laws and 
the FCC's regulatory responsibilities. The Act somewhat expanded 
the reach of the antitrust laws. It repealed section 221(a) of the 
Communications Act, which previously permitted local phone 
companies to merge without facing antitrust scrutiny if the FCC 
approved." In other respects, the 1996 Act left existing antitrust 
laws unchanged." All major telecom mergers will now go through 
standard Hart-Scott-Rodino review." " [0] ne of the underlying 
themes of the bill," the conference statement declares, is to get 
both the FCC and the Department of Justice "back to their proper 
roles . "" 

There is no reason for the FCC or state regulators to attempt 
to reinvent or rewrite law so recently considered, and so over- 
whelmingly approved, by Congress. Congress could have created the 
linkage that your question suggests, in the 1996 Act. But Congress 
didn ' t . 

2 . The whole point of price cap regulation is to give phone 
companies the incentive to find creative new ways to make their 
operations more efficient. Well -conceived mergers are one way to 
create new efficiencies. It would be unconscionable for regulators 
suddenly to discover, long after a price-cap deal was put in place, 
that they didn't mean that kind of efficiency. Regulatory flip 
flops of that character would simply destroy the credibility of 
price-cap regulatory programs. 

The most certain way to ensure that savings flow through to 
consumers is to step out of the way of competition. Competitive 
markets pass savings through to consumers. Over- regulated monopo- 
lies don't. 

3. No. The mergers combine geographically discrete markets. 
The merging companies start with no share at all in the interLATA 
toll markets, either inside or outside their territories. 



" The Commission was empowered to immunize mergers from "any 
Act or Acts of Congress making the proposed transaction unlawful." 
Communications Act of 1934 § 221(a) (codified at 47 U.S.C. 
§ 221(a)) . 

" Telecommunications Act of 1996 § 601(b)(1). ("Except as 
provided in paragraphs (2) and (3) , nothing in this Act or the 
amendments made by this Act shall be construed to modify, impair or 
supersede the applicability of any antitrust laws."). 

" 15 U.S.C. A. § 18a. 

^* Conference Report at 201. 



124 

Responses of Robert W. Crandall to Questions From Senator Hatch 

Answer 1. My testimony was that I cannot predict the future of the telecommuni- 
cations industry for two years: (1) the current prices and service levels have been 
so distorted by regulation that they are not a very good basis for making predictions 
for an industry in which competition largely dictates prices and service levels; and 
(2) the rate of technical progress is so rapid that the mix of wireless and wireline 
technologies and corresponding services are very difficult to predict. Nevertheless, 
one might hazard a guess that in five years there will be far more wireless competi- 
tion in all telecommunications services, but that switched broadband services over 
wireline companies may only be developing at that time. The key issue is whether 
the current local telephone companies, cable companies, long-distance companies, or 
other new entrants will build them. I cannot predict who the winnerts) will be. 

Answer 2. The rate of growth of telecommunications will depend largely on the 
speed with which artificial regulatory structures prevent entry and keep the rates 
for price-sensitive services artificially high. If legal and regulatory battles over the 
implementation of the 1996 Act persist for several years, growth will be restrained. 
Otherwise, the growth in output could be considerably above 10 percent per year 
until an economic recession occurs. The market shares of large telecommunications 
companies will depend more on technology, regulation, and entrepreneurial abilities 
of the players than on the growth of the market. I am not concerned that we are 
likely to have highly concentrated markets if regulators indeed step aside and allow 
competition to work. 

Answer 3. I do not think that mergers among large telecommunications carriers 
are required for these companies to compete in international markets or in other 
national markets. 

Answer 4. At this point, I think that most of the competition in the next five years 
will come from wireless carriers, but I remind you of my answer to #1 above. Pre- 
dictions in this sector are risky indeed. 

Thank you for offering me the opportunity to share my view with you and your 
staff. I welcome any further questions that you may have. 



Responses of Ron Binz to Questions From Senator Hatch 

Question 1. One of the purposes of this hearing is for the Committee to take a 
"snapshot" of competition in the telecommunications industry today. Can you briefly 
project into the future and tell us what you think a snapshot of the industry will 
look like 5 years from now? 

Answer 1. I believe that the future outlook for competition in the telecommuni- 
cations industry is murky. Congress took great strides toward eliminating many of 
the legal barriers to competition in passing the Telecommunications Act of 1996. At 
this stage, however, it is uncertain whether the goals of that legislation will be 
achieved. The least competitive market in the telecommunications industry today is 
the market for local exchange telephone service. Whether competition develops for 
local telephone service in the next five years depends to a great extent on decisions 
to be made in the near future at the FCC, in state regulatory bodies and in the 
courts. 

The markets for long distance service, telephone equipment, satellite services, and 
information services are relatively competitive today compared to the local telephone 
market, although none of these markets could be described as "perfectly competi- 
tive". The strength of competition in these markets in the next five years depends 
upon whether the major players in these industry sectors continue to consolidate. 

Question 2. How rapidly do you believe the telecommunications industry will grow 
in the next five years? Is it possible that, even while these mergers will create larg- 
er entities, their market share in the telecommunications industry in fact will not 
grow appreciably in the coming years? What are the realistic possibilities that the 
telecommunications industry is becoming too concentrated? 

Answer 2. As a whole, the telecommunications industry appears to be growing 
faster than the rest of the economy. Lower prices and services innovation, brought 
about in part by increasing competition, have stimulated tremendous growth in de- 
mand for telecommunications services. The telecommunications industry is likely to 
continue to grow over the next five years. In general, however, the market for local 
telephone service is growing at a slower pace than the rest of the telecommuni- 
cations industry. For instance, the number of basic telephone lines provided by local 
telephone companies typically grows about 3-5% per year, while long distance usage 
tends to expand about 7-10% per year. 

Whether mergers will lead to greater market share depends upon the particular 
merger and the particular market. The mergers of Bell Atlantic-NYNEX and SBC- 



125 

PacTel are not likely to lead to an increase in the market shares of these companies 
over local telephone service because, in the regions they serve, these companies have 
virtually 99% of this market already. 

Whether the markets for telecommunications services become too concentrated de- 
pends largely upon whether new entrants are given the opportunities to compete. 
We are certain to see greater consolidation among the existing industry players over 
the next few years. This increasing concentration needs to be balanced by measures 
that allow innovators and entrepreneurs to enter these markets in order to protect 
consumers from monopolistic or oligopolistic behavior. 

Question 3. How important do your think these mergers are to make American 
companies compete on a global basis? 

Answer 3. I believe that the companies involved in the Bell Atlantic-NYNEX and 
SBC-PacTel mergers overstate the effect of these mergers on global competition. 
American firms, in general, are achieving significant success in foreign markets 
today. Almost every one of the Regional Bell Operating Companies has invested 
heavily in cellular and cable systems in Europe and Asia. The biggest hurdles facing 
many American corporations are trade barriers that keep American firms, both com- 
petitive firms and monopolies, out of foreign markets. Furthermore, it would be a 
dangerous policy for the United States to sacrifice the interests of American con- 
sumers by allowing domestic companies to strengthen their monopolies at home sim- 
ply to gain advantages in overseas markets. 

Question 4. Who do you think will be the most effective competitors in the local 
exchange market? How much market share do you think non-incumbent local ex- 
change carriers will be able to gain? 

Answer 4. It is too soon to know what companies will be the most effective com- 
petitors in the local exchange markets. Each of the potential competitors has advan- 
tages and disadvantages. Cable companies have wires to over 95% of American 
homes, but they do not have switching or two-way capabilities. Cellular and Per- 
sonal Communications Services companies do not need to lay wires to every home, 
but they must construct and deploy thousands of antennas, and their spectrum does 
not yet provide them vsath enough capacity to serve large amounts of traffic. Long 
distance companies have a certain amount of name recognition, but they will need 
to use the facilities of the incumbent telephone companies for some time until they 
can build their own local networks. The virtue of the Telecommunications Act of 
1996 is that it does not attempt to pick winners and losers but instead requires the 
regulators to enforce competitively neutral rules that will allow the most efficient 
providers to succeed. 

More important than the question of market share is the question of market 
power. Market power depends upon many factors, including ease of competitive 
entry and price elasticity, in addition to market share. I believe that it will be quite 
some time before the incumbent local exchange companies lose their market power. 



Responses of Ron Binz to Questions From Senator Thurmond 

Question 1. Please state your views of concerns raised about whether effective 
local competition will ever develop for business and residential customers, despite 
the best efforts of the Congress. While many large companies are currently inter- 
ested in entry, is it certain that robust local competition ultimately will be achieved? 

Answer 1. No, it is not certain that robust local competition will be achieved, espe- 
cially for residential customers. There is little doubt that consumers want competi- 
tive alternatives, but it is not clear whether competitors will be able to overcome 
the significant technical and regulatory hurdles that can impede their ability to 
enter the local markets. Whether robust local competition develops depends to a 
great extent on decisions that wdll be made by federal and state regulators over the 
next few years. 

Question 2. As I stated in my opening statement, I am interested in views about 
how competition in local exchange and long distance services may develop over the 
next few years, and particularly your estimates of the number of likely competitors 
with substantial shares of those markets. Would each of you please comment? 

Answer 2. The interstate long distance market is fairly competitive today, with 
over 400 regional and national carriers currently providing service. This market is 
likely to become more competitive in the future, as recent evidence shows that the 
smaller long distance companies are growing faster than the bigger carriers. The 
intrastate long distance market is less competitive, in part because many states do 
not yet require intraLATA toll diahng parity for instrastate service. The lack of 
intraLATA toll dialing parity gives a tremendous advantage to the Regional Bell 
Operating Companies over intraLATA toll calls. Once states permit intraLATA com- 



126 

petition, and permit intraLATA toll dialing parity, the intraLATA toll market is also 
likely to become more competitive. 

The development of competition in the local exchange market is more problematic. 
Over the next five years, I believe that a number of cable companies, wireless com- 
panies, long distance companies, and resellers are likely to attempt to enter the 
local market. Whether they will be successful is hard to predict at this time. 

Question 3. When do each of you expect the Bell companies to meet the statutory 
requirements and begin offering inter-LATA long distance service in the states in 
their own regions? 

Answer 3. I understand that Ameritech is planning to file applications to provide 
interLATA service in at least two of its states before the end of this year, and that 
NYNEX may apply in one or two of its states early in 1997. Whether the carriers' 
plans to apply for interLATA service have changed as a result of the stay of the 
FCC's rules is too early to know. I believe, however, that the stay of the FCC's rules 
in the 8th Circuit Court of Appeals makes it much less likely that the FCC will 
have the statutory authority to approve these applications. Section 271 of the Tele- 
communications Act requires that RBOC to satisfy the "competitive checklist", 
which are, in part, determined by the FCC's rules. It will be difficult to know wheth- 
er the RBOCs have complied vdth the FCC's rules until we know what the rules 
are. 

Beyond this, there appears to be much work ahead of the RBOCs before their ap- 
plications to provide interLATA service could be approved. The RBOCs must "fully 
implement" interconnection agreements that satisfy the 14-point competitive check- 
list, yet it is not clear that any of the RBOCs have done so at this time. Further, 
the RBOCs must face facilities-based competition from a competitor serving busi- 
ness and residential subscribers. I do not know of any residential consumer who has 
a choice of a competitive local exchange company today, much less a facilities-based 
competitor. 

Finally, it is worth mentioning that whether the RBOCs are able to provide 
interLATA service inside their regions depends to a great extent on their own ac- 
tions. The sooner the RBOCs unbundle their networks on a non-discriminatory 
basis, at cost-based rates, the sooner they will be able to provide interLATA service. 

Question 4. Mr. Binz, you suggested in your written testimony that the Bell merg- 
ers should be conditioned on the Bells first satisfying the checklist found in Section 
271 of the Telecommunications Act. In your view, who has the legal authority to 
impose such a requirement? 

Answer 4. First, I would like to clarify that CPI believes the RBOCs should meet 
the competitive checklist not simply in one state, but in every state in which they 
are the incumbent provider of local exchange service today, before the mergers are 
approved. Regulators may also wish to condition their approval of the mergers on 
other consumer benefits, such as flowing through cost efficiencies of the mergers to 
consigners. 

I believe that several parties have the legal authority to impose the competitive 
checklist as a precondition to approval of the mergers. The Department of Justice 
could enter into a settlement agreement with the RBOCs under which the Depart- 
ment would recommend that the court approve the mergers if the RBOCs agree to 
meet the checklist in each state. If no settlement is reached, the Department could 
bring an action under the antitrust laws, and the court hearing the case could de- 
cide on its own to require implementation of the checklist as a precondition to ap- 
proving the mergers. The Federal Communications Commission, under its authority 
to enforce the broad "public interest" standard of the Communications Act, could re- 
quire the checklist to be implemented before giving its approval. Some states, such 
as California, have broad statutory authority to consider measures such as the 
checklist requirement in the process of considering the mergers. Finally, of course, 
the U.S. Congress has the authority to impose such a condition. 

Question 5. Mr. Binz and Mr. Hatfield, what is yoiu- response to the argument 
that there was no particular reason for initially dividing the Bell System into seven 
Bell operating companies instead of five, so there should be no objection now to the 
proposed consolidations? 

Answer 5. At the time the court was considering the divestiture, the local ex- 
change business was viewed as a natural monopoly. There was little expectation at 
the time that the market for local exchange telephone service could become competi- 
tive. Now that the local exchange market is on the verge of becoming competitive, 
there is little economic or policy sense to allow the incumbent local exchange compa- 
nies to strengthen without taking countervailing measures to strengthen competi- 
tive opportunities. 



127 

Responses op^ Ron Binz to Questions From Senator Leahy 

Question 1. Would conditioning approval of the pending mergers between the Bell 
Companies on those companies meeting the "competitive checklist" contained in the 
Telecommunications Act of 1996 for each of the States in which they operate today, 
help assure that resources continue to be directed first to opening up the local loop 
and then the mergers? 

Answer 1. CPI has no desire to delay the mergers simply for the purposes of 
delay. CPI believes that the mergers threaten the growth of competition for local 
telephone service. This threat must be balanced by measures to promote competi- 
tion. The idea behind the "checklist precondition" is to ensure that the RBOCs open 
the local loop to competition. The RBOCs should employ whatever resources are nec- 
essary to ensure that the checklist preconditions are met before the mergers are ap- 
proved. 

Question 2. Should regulators insist that operating efficiencies resulting from the 
mergers between the Bell Companies be passed along to ratepayers, particularly in 
those States with price cap regulation? If so, how can regulators ensure that rate- 
payers get the benefit of these cost savings? 

Answer 2. Regulators should insist that an equitable share of the cost efficiencies 
from the mergers be flowed through to consumer in both rate of retxu-n and price 
cap States. These cost efficiencies can be flowed through in several ways, including 
rate refunds or reductions in future rates. 

Question 3. Under the Telecommunications Act, the Justice Department has a 
major consultative role in the FCC's decision on a Bell Company's application for 
entry into the in-region long distance market, although the Department's comments 
"shall not have any preclusive effect" on that decision. [47 U.S.C. Section 
271(d)(2)(A)]. Do you think the pending mergers between the Bell Companies, if ap- 
proved, should have any effect on the Justice Department and FCC's evaluation of 
an application by one of the merged Bell Companies for entry into long distance 
service in their new combined territories? Could you explain why? 

Answer 3. First, there is no question that both the Justice Department and the 
FCC have the legal authority to consider the effect of mergers on the Bell Compa- 
nies' long distance applications. The legislation allows the Justice Department to 
evaluate the applications under any standard it beheves is appropriate, and the 
FCC's public interest standard is very broad. CPI believes that the mergers increase 
the companies' ability and incentive to engage in anticompetitive activity against 
local exchange competitors. CPI thus believes that the mergers should be one of sev- 
eral factors that inform the views of the Department and the FCC when considering 
the companies' long distance applications. 



Additional Submissions for the Record 



Prepared Statement of Judy Brewer, Massachusetts Assistive Technology 

Partnership Center 

Thank you for this opportunity to submit written testimony in the issue of "Merg- 
ers and Competition for the Telecommunications Industry." 

As Project Director of the Massachusetts Assistive Technology Partnership 
(MATP) I am keenly aware of the benefits of technology for people with disabilities. 
I am also aware of the impact in the lives of people with disabilities when there 
are barriers to the use of technology, due to lack of vigilance in the design and de- 
velopment process. The MATP is one of 56 federally funded Tech Act Projects which 
promote increased access to assistive technology for people with disabilities through 
a variety of consumer-response, systems change activities including public aware- 
ness, information and referral, training, technical assistance, and particularly policy 
development and advocacy. 

MATP staff have been active in areas of accessible information technology on the 
state and national levels. We have been active in advocating for accessible informa- 
tion kiosks; negotiating with Microsoft Corporation regarding the accessibility of its 
Windows 95 and Windows NT operating systems; working with the General Services 
Administration's Center for Information Technology Accommodation on the develop- 
ment of accessibility performance benchmark testing; serving on the National Coun- 
cil of Disability Tech^X'^atch Task Force, NYNEX's Consumer Advisory Panel for New 
England, and the Board of the Adaptive Environments Center, and serving as co- 
chair of the Compliance Subcommittee of the Telecommunications Access Advisory 
Committee, which is developing recommendations for the telecommunications equip- 
ment accessibihty guidelines as required by Section 255 of the Telecommunications 
Act of 1996. 

The disability community has become actively involved in the Telecommunications 
Act of 1996 regulatory proceedings and is watching with interest industry's post-leg- 
islation activities. In particular, being located in Massachusetts, our constituents 
are interested in the NYNEX and Bell Atlantic merger. The MATP looks to the 
NYNEX-Bell Atlantic merger as an opportunity for the "best access practices" of 
both companies to be combined in the new Bell Atlantic. 

Over the years the MATP has worked closely writh NYNEX on accessibility issues 
and we are pleased with its progress. NYNEX has taken a lead in making products 
and services accessible for people with disabiUties. It is one of the first companies 
to adopt universal design principles which lay the groundwork for the development 
and deployment of accessible telecommunications. These principles state that 
NYNEX will (paraphrased): 

Provide quality services that can reasonably accommodate a broad range of 
diverse users, including individuals with disabilities; 

Review its existing services to determine which services should be made more 
accessible; 

Design and develop its services, to the extent readily achievable, so as to be 
accessible to a broad range of diverse users; 

Market and provide its services in a manner consistent with accessibility by 
a broad range of diverse users; 

Employ these universal design principles company-wide, in its relationships 
with customers, employees, shareholders and suppliers; and encourage compa- 
nies related to but not controlled by NYNEX to adopt these principles. 
NYNEX has established very active consumer advisory panels in New England 
and in New York. In Massachusetts, NYNEX established the Center for Individuals 
with Disabilities which administers the state-wide equipment distribution program. 
In addition NYNEX has taken the lead in closed captioning of all of its television 
advertisements. 

(128) 



129 

NYNEX serves on the Telecommunications Access Advisory Committee under the 
Architectural and Transportation Barriers Compliance Board (Access Board), which 
will develop recommendations for guidelines for accessible telecommunications 
equipment and customers premises equipment. 

The MATP would be supportive of a "new" Bell Atlantic which integrates 
NYNEX's present activities and commitment to accessible telecommunications prod- 
ucts and services for people with disabilities which include: 

The "new" Bell Atlantic's adoption and integration of the NYNEX universal 
design principles; 

Support for the establishment of telecommunications equipment distribution 
programs in the "new" Bell Atlantic states; 

Creation of universal design committees and consumer panels to provide es- 
sential consumer input; 

Closed captioning of all "new" Bell Atlantic advertising; 

An expansion of NYNEX and Bell Atlantic products and services which are 
already accessible and usable by people v*dth disabilities. 
There is an opportunity for the "new" Bell Atlantic to build on NYNEX's and Bell 
Atlantic's strengths, and to become the leader in accessible telecommunications for 
people with disabilities. The Massachusetts Assistive Technology Partnership looks 
forward to meeting with NYNEX and Bell Atlantic to discuss now we can work to- 
gether to make this happen. 



Prepared Statement of Dr. Barbara O'Connor, California State University, 
Department of Communications Studies 

SUMMARY 

Mergers in the telecommunications industry are driven by technological advances 
and the removal of regulatory barriers that have hampered competition. They are, 
of themselves, neither good nor bad: they are a business-driven response to competi- 
tion in an exploding industry. 

Because mergers are subject to review by various federal and state agencies, how- 
ever, mergers provide policy makers with an opportunity to promote the public in- 
terest. This interest will be well-served if the following points are taken into consid- 
eration: 

Mergers allow two companies to combine resources and customer bases to 
gain broader efficiencies. These gains should lead to increased investment in ad- 
vanced network infrastructure and the resvilting introduction of new services at 
costs that are attractive to consumers. 

The proposed mergers, between Bell Atlantic and NYNEX and between SBC 
and Pacific Telesis, are of particular interest to consumers. These companies 
represent the primary access point to the local switched network, and thus the 
"information superhighway," in the near-term future for the consimiers in their 
regions. Because no other competitor has announced plans to launch a univer- 
sal, facilities-based competitive drive for these customers, it is in the consumers' 
interest for these local exchange carriers to remain successful, competitive busi- 
nesses. 

New companies will adopt the best management practices of the merging 
partners; they should also adopt the best consumer and pubHc interest practices 
of their former entities. 
Given these points, policy makers should adopt two strategies when considering 
mergers in the telecommunications industry. First, they should do what they can 
to assure that merging companies adopt the best consumer and public interest prac- 
tices of their merged partners. Second, they should encourage regulators to establish 
explicit service standards that any provider would have to meet and then follow 
through qviickly and effectively on failures to meet those standards. This includes 
timely regulator responses to individual consiuner complaints. 

My name is Dr. Barbara O'Connor. I am a Professor of Communications at the 
California State University, Sacramento, where I also direct the Institute for the 
Study of Politics and Media. I am also the founding Chair of the Alliance for Public 
Technology, a nonprofit public interest group that promotes access to affordable and 
useful information and communications services and technologies for all people. Fur- 
ther, I am a member of the Federal Communications Commission's Network Reli- 
ability Council and a member of Bellcore's Advisory Board. 

I have prepared this testimony to provide this Committee with a consiuner per- 
spective on mergers and competition within the telecommunications industry. Merg- 
ers are a natural outcome of the technological convergence among telecommuni- 



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130 3 9999 05984 095 7 



cations industries that we previously saw as distinct: television, cable, telephony, 
electronic online communications, etc. With digitization, these distinctions have 
blurred, and companies operating in one industry have naturally begun to look at 
the others as potential new marketplaces. 

With the Telecommunications Act of 1996, Congress established a pohcy frame- 
work to allow competition to occur as freely and fairly as possible. They did so with 
the explicit expectation that consumers would benefit — from new services that 
would be universally available at affordable prices. They emphasized the importance 
of universality, and included special considerations for people with disabilities, low- 
income consumers, libraries, schools, and museums. 

I do not believe that large corporate mergers, in and of themselves, are a threat 
to consumer interests. In fact, by improving efficiencies and combining the best 
practices of the merging firms, mergers can benefit consumers with lower prices, a 
wider array of services, and better programs for serving various consumers with 
special needs. Policy makers can help assure that these benefits are realized by: 

Using their leverage, where possible, to make sure that the new companies 

adopt the best consvuner and public interest practices of their merged partners; 

and 
Encouraging regulators to establish explicit service standards and follow 

through quickly and effectively on failures to meet those standards. 

I. Mergers can benefit consumers 

Mergers of large telecommunications companies are driven by technological con- 
vergence — the fact that all kinds of messages can now be digitized — and by compa- 
nies' attempts to protect their core markets while entering new markets. Mergers 
allow companies to combine their resources, attain efficiencies of scale and scope, 
and broaden their customer base. The Telecommunications Act of 1996 removed 
legal and regulatory barriers against entry into new lines of business, which gave 
further impetus to mergers. For example, the widely-respected Yankee Group de- 
scribed the proposed merger between Bell Atlantic and NYNEX this way: 

"The New York- Washington, D.C. business corridor can essentially be viewed as 
a single marketplace, and the constraints on companies serving the telecommuni- 
cations needs of this marketplace were artificially erected by regulation. Absent that 
regulation, a partnership between these two companies was an obvious step to cap- 
italize on this market."^ 

In the proposed merger. Bell Atlantic and NYNEX estimate they will save at least 
$600 million dollars annually due to infrastructure consolidation and the initial re- 
duction of 3,000 redundant management and administrative jobs. 

These savings, and the merged companies' combined ability to attract financing, 
should allow them to keep prices affordable, and make significant new investment 
in infrastructure and in R&D. According to investment analyst Jeffrey Kagan of 
Kagan Telecom Associates in Marietta, Georgia, the merger could produce econo- 
mies of scale that could translate into benefits for consumers. ^ As an example, the 
1995 merger of Bell Atlantic and NYNEX's wireless operation brought a 21% reduc- 
tion in cash expense per subscriber within one year, the lowest in the industry. ^ 

Mergers can also benefit consvuners by sharing the partners' complementary 
strengths. In the proposed merger between SBC and Pacific Telesis, for example, 
SBC customers could benefit from Pacific Telesis's leadership among the Bell Oper- 
ating Companies in Internet services. Pacific Telesis will benefit from SBC's strong 
financial position following the decrease in their operating revenue from the spin- 
off of their cellular properties in 1994.-* 

These benefits are especially striking when one considers one of the outstanding 
consumer-related programs that could be expanded in the proposed mergers. Pacific 
Bell, for example, has a Telecommunications Consumer Advisory Panel (TCAP) that 
has become a very effective way for the company to stay in touch with California's 
diverse customer base. TCAP members include respected community leaders who 
give Pacific Bell input on various public policy decisions. The TCAP is also a vehicle 
for communication on telecommunications issues back to the consumer community 
in California. If the proposed merger between SBC and Pacific Telesis occurs, this 
program could benefit the consumer community in SBC's states if it is adopted and 
expanded by the new company. 



* Yankee Group, "Consumer Communications White Paper," v. 13, n. 12, April. 

2 Phil Waga, "NYNEX Merger: No Dollars for Dialers," Westchester Today, April 1996. 

3 Bell Atlantic News Release, "Bell Atlantic First Quarter Net Up 13.5 Percent," April 18, 
1996. 

■* Yankee Group, "Consumer Communications White Paf)er," v. 13, n. 11, May 1996. 



131 

Similar opportunities exist in the proposed Bell Atlantic-NYNEX merger. The 
Massachusetts Assistive Technology Partnership Center, for example, has had a 
wonderfully productive relationship with NYNEX, resulting in NYNEX's adoption of 
"universal design" principles and a commitment to make their products and services 
accessible to all people, regardless of disability. This leadership should benefit the 
"new" Bell Atlantic's customers, as well. These examples help show why policy mak- 
ers should do what they can to assure that such model programs are sustained and 
expanded when telecommunications companies merge. 

//. Some consumer concerns 

The major issue raised in policy circles by a merger is competition: is the merger 
anti-competitive? This concern is presented as a consumer concern, given that a re- 
duction in competition would deprive consumers of competitions benefits. For this 
reason, mergers involving local exchange companies undergo extensive review by 
the Department of Justice. I am confident in that agency's ability to identify and 
resolve antitrust issues, just as it does in other industries. 

Ironically, when I actually talk to consumers, their concerns are not focused on 
the issue of competition. They look, rather, at the specifies of their service: price and 
access to service, readability of their bills, service offering, customer service, the res- 
olution of complaints, etc. In general, I think mergers can have positive effects on 
these elements. Price and access to service. Foremost for many consumers is the 
issue of price and access to service. In the case of merges involving local exchange 
carriers, this issue is confounded by the ongoing question of how the costs of the 
public telephone network should be allocated, regardless of a merger. 

No matter what one's position on that question, people seem to agree that for the 
foreseeable future, the public telephone network operated by existing local exchange 
carriers will be the only universal infrastructure for access to telephone and data 
services for residences. Other companies that are planning facilities-based competi- 
tion are focusing on high-density markets; they will not provide universal service 
in the near future. For this reason, it is paramount that local exchange carriers con- 
tinue to be viable, competitive businesses; even their competitors rely on the exist- 
ing local exchange infrastructure. If a merger makes business sense (for example, 
in the eyes of the business press and financial analysts), it can also make sense for 
the companies's customers. 

There are so many factors that will affect the prices and availability of tele- 
communications services that we will never know for sure which is better for con- 
sumers: merged companies or independent companies. In this environment, it is vi- 
tally important that policy makers set standards for telecommunications providers, 
then focus their energies on assuring that those standards are met, not on mandat- 
ing how they are met. In local exchange service, this means estabUshing an evolving 
definition of universal service, and setting up an equitable way for sustaining that 
level of service. 

Company responsiveness. — Mergers sometimes raise consumers' concerns that the 
management of the merged telecommunications company will be further away, and 
thus less responsive to their needs. While this may have been a legitimate concern 
when companies first started consolidating and closing local branches, it has not 
been a significant factor in telecommunications for decades. When one lives in Buf- 
falo, for example, it doesn't really matter whether the headquarters is in New York 
City or in Philadelphia; responsiveness is a matter of management performance, not 
distance. 

Furthermore, the public system for resolving problems through states' consumer 
advocates and public utility commissions, remains the same after a merger. 

Service quality. — Mergers also raise consumers' concerns about service quality. 
"Will the new company respond to my questions and concerns promptly? Will I get 
new services when they are introduced elsewhere? What if I have a complaint?" Al- 
though it is natural to be afraid of the unfamiliar, I believe that mergers actually 
promise to bring improvements in company operations, if anything. The merged 
company should adopt the best management practices of the merging parties, purely 
to maximize its business advantage. To fear that service quality will fall is to as- 
sume that maintaining high customer service standards is an unnecessary expense 
for businesses; anyone in the emerging competitive telecommunications industry 
knows that this is not true. 

Consumer loyalty is a key competitive advantage as companies try to protect their 
core markets while entering new ones. 

///. Conclusion 

From a consumer perspective, the impact of a merger depends upon the particu- 
lars of the companies involved. Mergers can strengthen the merging partners, im- 



132 

proving their financial position, creating economies of scale, and increasing their 
customer base. These changes can lead to improved infrastructure, lower prices, and 
a wider array of services and public interest programs for consumers. These benefits 
are particular important when local exchange companies are involved in mergers, 
because local exchange networks will continue to be the only provider of universal 
access to telephone and data services for residences for many years to come. 

Given these opportunities, policy makers should adapt two strategies as they con- 
sider mergers in the telecommunications industry. First, they should do what they 
can to assure that merging companies adopt the best consumer and public interest 
practices of their merged partners. Second, they should encourage regulators to es- 
tablish explicit service standards that any provider would have to meet, and then 
follow through quickly and effectively on failures to meet those standards. This in- 
cludes timely regulator responses to individual consumer complaints. 



MFS Communications Company, Inc., 

Omaha, NE, September 25, 1996. 
Hon. Orrin G. Hatch, 
Chairman, Senate Judiciary Committee, Washington, DC. 

Dear Senator Hatch: I wanted to respond for the record to testimony received 
at the September 11, 1996 Senate Judiciary Committee hearing on mergers in the 
telecommunications industry. During his oral statement, GTE's general counsel, 
William Barr, sought to make the point that incumbent local exchange carriers are 
already facing significant competition from new competitors. To support this claim 
Mr. Barr stated that MFS Communications Company, Inc. ("MFS") provided local 
telephone service to congressional offices and that Bell Atlantic, the local exchange 
carrier for Washington, D.C., did not. "This is a very profitable center here, Capital 
Hill * * * . The fact is. Bell Atlantic doesn't serve it. It was taken away by MFS". 
This statement is just flat wrong and the Committee should understand the facts. 

MFS Communications Company is a leading provider of communication services 
for business. Through its operating companies, MFS provides a wide range of high 
quality voice, data and other enhanced services and systems specifically designed 
to meet the requirements of business and government customers. MFS is a publicly- 
held company and its common stock is traded on the Nasdaq National Market under 
the symbol MFST. MFS is headquartered in Omaha, Nebraska. 

Contrary to Mr. Barr's averment, MFS is not the local service provider for CapitJiI 
Hill. That service is in fact provided by Bell Atlantic. MFS provides no switched 
service in Washington, D.C. and has only recently been given a certificate to do so. 
MFS' subsidiary Metropolitan Fiber Systems of Washington, D.C, Inc. provides 
some limited private line service and also provides some access service to specific 
business and government customers but, as Mr. Barr should know, this is not local 
exchange service and certainly is no substitute for the comprehensive local services 
provided by Bell Atlantic. 

MFS is proud to be one of the new competitors for local telephone service and we 
hope to grow into a significant alternative to companies such as Bell Atlantic and 
GTE but that will take time and a permissive regulatory environment. We believe 
the Telecommunications Act of 1996 and the FCC's interconnection rules create just 
such an environment and we look forward to offering true competition to incumbent 
local exchange carriers in the years to come. 

We appreciate the opportunity to correct the record and hope that this letter will 
be included in the hearing record proximate to Mr. Barr's testimony. 
Sincerely, 

James Q. Crowe, 
Chairman and Chief Executive Officer. 

o 



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